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Final project 3


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comparative analysis on NPA

comparative analysis on NPA

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  • 1. Executive summaryThe future of Indian Banking represents a unique mixture of unlimited opportunities amidstinsurmountable challenges. On one hand, we see the scenario represented by the rapidprocess of globalization presently taking shape bringing the community of nations in theworld together, transcending geographical boundaries, in the sphere of trade and commerce,and even employment opportunities of individuals. All these indicate newly emergingopportunities for Indian Banking.But on the darker side we see the accumulated morass, brought out by three decades ofcontrolled and regimented management of the banks in the past. It has siphoned profitabilityof the banks, accumulated bloated NPA and threatens Capital Adequacy of the Banks andtheir continued stability. In the nutshell the problem is how to shed the legacies of the pastand adapt to the demands of the new age.The accumulation of huge non-performing assets in banks has assumed great importance.The depth of the problem of bad debts was first realized only in early 1990s. The magnitudeof NPAs in banks and financial institutions is over Rs.1, 50,000crore.The project has tried to analyze the present situation in Indian banks. With the process ofliberalization and globalization, the bank credit has witnessed spectacular growth as a catalystof economic growth. With the increase in the growing volume of credit, the volume ofimpaired credit has also multiplied due to various factors. This burgeoning level of NPA hadbecome a grave matter of concern for the Indian banks.In the study conducted focus was laid on the approach of various banks to manage NPAs, theprocess of identification of the same, the classification and assessment of provisions and thepre-sanction appraisal methodology and the post-sanction follow-up procedure.The nature of research was descriptive as well as exploratory as the study was aimed atstudying the various measures adopted by banks for management of NPAs in the bankingsector. 1 Alliance Business Academy
  • 2. While gross NPA reflects the quality of the loans made by banks, net NPA shows the actualburden of banks. Now it is increasingly evident that the major defaulters are the bigborrowers coming from then on-priority sector. The banks and financial institutions have totake the initiative to reduce NPAs in a time bound strategic approach.Public sector banks figure prominently in the debate not only because they dominate thebanking industries, but also since they have much larger NPAs compared with the privatesector banks. This raises a concern in the industry and academia because it is generally feltthat NPAs reduce the profitability of a bank, weaken its financial health and erode itssolvency.For the recovery of NPAs a broad framework has evolved for the management of NPAsunder which several options are provided for debt recovery and restructuring. Banks and FIshave the freedom to design and implement their own policies for recovery and write-offincorporating compromise and negotiated settlements. 2 Alliance Business Academy
  • 3. 1. IntroductionNPA: The three letters Strike terror in banking sector and business circle today. NPA is shortform of “Non Performing Asset”. The dreaded NPA rule says simply this: when interest orother due to a bank remains unpaid for more than 90 days, the entire bank loan automaticallyturns a non performing asset. The recovery of loan has always been problem for banks andfinancial institution. To come out of these first we need to think is it possible to avoid NPA,no cannot be then left is to look after the factor responsible for it and managing those factors.1.1Definitions:An asset, including a leased asset, becomes non-performing when it ceases to generateincome for the bank.A „non-performing asset‟ (NPA) was defined as a credit facility in respect of which theinterest and/ or instalment of principal has remained „past due‟ for a specified period of timeWith a view to moving towards international best practices and to ensure greatertransparency, it has been decided to adopt the „90 days’ overdue’ norm for identification ofNPAs, from the year ending March 31, 2004. Accordingly, with effect from March 31, 2004,a non-performing asset (NPA) shall be a loan or an advance where;  Interest and/ or instalment of principal remain overdue for a period of more than 90 days in respect of a term loan,  The account remains „out of order‟ for a period of more than 90 days, in respect of an Overdraft/Cash Credit (OD/CC), The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted,  Interest and/or instalment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purposes.As a facilitating measure for smooth transition to 90 days norm, banks have been advised tomove over to charging of interest at monthly rests, by April 1, 2002. However, the date of 3 Alliance Business Academy
  • 4. classification of an advance as NPA should not be changed on account of charging of interestat monthly rests. Banks should, therefore, continue to classify an account as NPA only if theinterest charged during any quarter is not serviced fully within 180 days from the end of thequarter with effect from April 1, 2002 and 90 days from the end of the quarter with effectfrom March 31, 2004.Banking:„Banking‟ as defined in the Section 5 (b) of the Banking Regulations Act, 1949 is thebusiness of "Accepting deposits of money from the public for the purpose of lending orinvestment". These deposits are repayable on demand or otherwise, and withdraw able by acheque, draft, and order or otherwise.1.2 NPAs: AN ISSUE FOR BANKS AND FIs IN INDIATo start with, performance in terms of profitability is a benchmark for any business enterpriseincluding the banking industry. However, increasing NPAs have a direct impact on banksprofitability as legally banks are not allowed to book income on such accounts and at thesometime are forced to make provision on such assets as per the Reserve Bank of India (RBI)guidelines. Also, with increasing deposits made by the public in the banking system, thebanking industry cannot afford defaults by borrower s since NPAs affects the repaymentcapacity of banks.Further, Reserve Bank of India (RBI) successfully creates excess liquidity in the systemthrough various rate cuts and banks fail to utilize this benefit to its advantage due to the tearof burgeoning non-performing assets.1.3 FACTORS FOR RISE IN NPAsThe banking sector has been facing the serious problems of the rising NPAs. But theproblem of NPAs is more in public sector banks when compared to private sector banks andforeign banks. The NPAs in PSB are growing due to external as well as internal factors. 4 Alliance Business Academy
  • 5. 1.3.1EXTERNAL FACTORS:-  Ineffective recovery tribunal The Govt. has set of numbers of recovery tribunals, which works for recovery of loans and advances. Due to their negligence and ineffectiveness in their work the bank suffers the consequence of non-recover, thereby reducing their profitability and liquidity.  Willful Defaults There are borrowers who are able to pay back loans but are intentionally withdrawing it. These groups of people should be identified and proper measures should be taken in order to get back the money extended to them as advances and loans.  Natural calamities This is the measure factor, which is creating alarming rise in NPAs of the PSBs. every now and then India is hit by major natural calamities thus making the borrowers unable to pay back there loans. Thus the bank has to make large amount of provisions in order to compensate those loans, hence end up the fiscal with a reduced profit. Mainly ours farmers depends on rain fall for cropping. Due to irregularities of rain fall the farmers are not to achieve the production level thus they are not repaying the loans.  Industrial sickness Improper project handling , ineffective management , lack of adequate resources , lack of advance technology , day to day changing govt. Policies give birth to industrial sickness. Hence the banks that finance those industries ultimately end up with a low recovery of their loans reducing their profit and liquidity. 5 Alliance Business Academy
  • 6.  Lack of demand Entrepreneurs in India could not foresee their product demand and starts production which ultimately piles up their product thus making them unable to pay back the money they borrow to operate these activities. The banks recover the amount by selling of their assets, which covers a minimum label. Thus the banks record the non- recovered part as NPAs and has to make provision for it. Change on Govt. policies With every new govt. banking sector gets new policies for its operation. Thus it has to cope with the changing principles and policies for the regulation of the rising of NPAs. The fallout of handloom sector is continuing as most of the weavers Co- operative societies have become defunct largely due to withdrawal of state patronage. The rehabilitation plan worked out by the Central government to revive the handloom sector has not yet been implemented. So the over dues due to the handloom sectors are becoming NPAs.1.3.2INTERNAL FACTORS:- Defective Lending process There are three cardinal principles of bank lending that have been followed by the commercial banks since long. i. Principles of safety ii. Principle of liquidity 6 Alliance Business Academy
  • 7. iii. Principles of profitability i. Principles of safety :- By safety it means that the borrower is in a position to repay the loan both principal and interest. The repayment of loan depends upon the borrowers: a) Capacity to pay b) Willingness to pay a) Capacity to pay depends upon: 1. Tangible assets 2. Success in business b) Willingness to pay depends on: 1. Character 2. Honest 3. Reputation of borrower The banker should, therefore take utmost care in ensuring that the enterprise or business for which a loan is sought is a sound one and the borrower is capable of carrying it out successfully .He should be a person of integrity and good character. Inappropriate technology Due to inappropriate technology and management information system, market driven decisions on real time basis cannot be taken. Proper MIS and financial accounting system is not implemented in the banks, which leads to poor credit collection, thus NPA. All the branches of the bank should be computerized. Improper SWOT analysis 7 Alliance Business Academy
  • 8. The improper strength, weakness, opportunity and threat analysis is another reason for rise in NPAs. While providing unsecured advances the banks depend more on the honesty, integrity, and financial soundness and credit worthiness of the borrower. Banks should consider the borrowers own capital investment. it should collect credit information of the borrowers from_ a. From bankers. b. Enquiry from market/segment of trade, industry, business. c. From external credit rating agencies. Analyze the balance sheet. True picture of business will be revealed on analysis of profit/loss a/c and balance sheet. Purpose of the loan When bankers give loan, he should analyze the purpose of the loan. To ensure safety and liquidity, banks should grant loan for productive purpose only. Bank should analyze the profitability, viability, long term acceptability of the project while financing. Poor credit appraisal system Poor credit appraisal is another factor for the rise in NPAs. Due to poor credit appraisal the bank gives advances to those who are not able to repay it back. They should use good credit appraisal to decrease the NPAs. Managerial deficiencies The banker should always select the borrower very carefully and should take tangible assets as security to safe guard its interests. When accepting securities banks should consider the_ 8 Alliance Business Academy
  • 9. 1. Marketability 2. Acceptability 3. Safety 4. Transferability. The banker should follow the principle of diversification of risk based on the famous maxim “do not keep all the eggs in one basket”; it means that the banker should not grant advances to a few big farms only or to concentrate them in few industries or in a few cities. If a new big customer meets misfortune or certain traders or industries affected adversely, the overall position of the bank will not be affected. Like OSCB suffered loss due to the OTM Cuttack, and Orissa hand loom industries. The biggest defaulters of OSCB are the OTM (117.77lakhs), and the handloom sector Orissa hand loom WCS ltd (2439.60lakhs). Absence of regular industrial visit The irregularities in spot visit also increases the NPAs. Absence of regularly visit of bank officials to the customer point decreases the collection of interest and principals on the loan. The NPAs due to willful defaulters can be collected by regular visits. Re loaning process Non remittance of recoveries to higher financing agencies and re loaning of the same have already affected the smooth operation of the credit cycle. Due to re loaning to the defaulters and CCBs and PACs, the NPAs of OSCB is increasing day by day.1.4 PROBLEMS DUE TO NPA 9 Alliance Business Academy
  • 10. 1. Owners do not receive a market return on their capital .in the worst case, if the banks fails, owners lose their assets. In modern times this may affect a broad pool of shareholders. 2. Depositors do not receive a market return on saving. In the worst case if the bank fails, depositors lose their assets or uninsured balance. 3. Banks redistribute losses to other borrowers by charging higher interest rates, lower deposit rates and higher lending rates repress saving and financial market, which hamper economic growth. 4. Nonperforming loans epitomize bad investment. They misallocate credit from good projects, which do not receive funding, to failed projects. Bad investment ends up in misallocation of capital, and by extension, labor and natural resources.Nonperforming asset may spill over the banking system and contract the money stock, whichmay lead to economic contraction. This spillover effect can channelize through liquidity orbank insolvency:a) When many borrowers fail to pay interest, banks may experience liquidity shortage. Thiscan jam payment across the country.b) Illiquidity constraints bank in paying depositorsc) Undercapitalized banks exceed the bank‟s capital base.Out of Order status: An account should be treated as out of order if the outstanding balance remainscontinuously in excess of the sanctioned limit/drawing power. In cases where the outstandingbalance in the principal operating account is less than the sanctioned limit/drawing power, butthere are no credits continuously for six months as on the date of Balance Sheet or credits arenot enough to cover the interest debited during the same period, these accounts should betreated as out of order. 10 Alliance Business Academy
  • 11. ‘Overdue‟: Any amount due to the bank under any credit facility is „overdue‟ if it is not paidon the due date fixed by the bank.1.5 Types of NPAA] Gross NPAB] Net NPAA] Gross NPA:Gross NPAs are the sum total of all loan assets that are classified as NPAs as per RBIguidelines as on Balance Sheet date. Gross NPA reflects the quality of the loans made bybanks. It consists of all the non-standard assets like as sub-standard, doubtful, and lossassets.It can be calculated with the help of following ratio:Gross NPAs Ratio Gross NPAsGross AdvancesB] Net NPA:Net NPAs are those type of NPAs in which the bank has deducted the provision regardingNPAs. Net NPA shows the actual burden of banks. Since in India, bank balance sheetscontain a huge amount of NPAs and the process of recovery and write off of loans is verytime consuming, the provisions the banks have to make against the NPAs according to thecentral bank guidelines, are quite significant. That is why the difference between gross andnet NPA is quite high.It can be calculated by following 11 Alliance Business Academy
  • 12. Net NPAs  Gross NPAs – Provisions Gross Advances - Provisions1.6 GLOBAL DEVELOPMENTS AND NPAsThe core banking business is of mobilizing the deposits and utilizing it for lending toindustry. Lending business is generally encouraged because it has the effect of funds beingtransferred from the system to productive purposes, which results into economic growth.However lending also carries credit risk, which arises from the failure of borrower to fulfillits contractual obligations either during the course of a transaction or on a future obligation.A question that arises is how much risk can a bank afford to take? Recent happenings in thebusiness world -Enron, WorldCom, Xerox, Global Crossing do not give much confidence tobanks. In case after case, these giant corporate becan1e bankrupt and failed to provideinvestors with clearer and more complete information thereby introducing a degree of riskthat many investors could neither anticipate nor welcome. The history of financial institutionsalso reveals the fact that the biggest banking failures were due to credit risk. Due to this,banks are restricting their lending operations to secured avenues only with adequate collateralon which to fall back upon in a situation of default. 12 Alliance Business Academy
  • 13. 2.1 BACKGROUND:Banking system which constitutes the core of the financial sector plays a vital role intransmitting monetary policy impulses to the economic system. Therefore its efficiency anddevelopment are vital for enhancing growth and improving the changes for stability. Duringthe recent past, profits of the Bank came under pressure due to rise in interest rates, decreasein non-interest income and increase in provisions and contingencies.2.2LITERATURE REVIEWIn presence of NPAs has affected the profitability, liquidity and competitive functioning ofbanks and finally the psychology of the bankers in respect of their disposition towards creditdelivery and credit expansion. Effects range from liquidity crisis, deposit runs and bankfailures that lead to writing off of non-performing loans, restructuring, mergers andacquisitions and even closer of weaker banks. The accumulation of huge non-performingassets in banks has assumed great importance. The depth of the problem of bad debts wasfirst realized only in early 1990s. The magnitude of NPAs in banks and financial institutionsis over Rs.1, 50,000crores.While gross NPA reflects the quality of the loans made by banks, net NPA shows the actualburden of banks. Now it is increasingly evident that the major defaulters are the bigborrowers coming from the non-priority sector. The banks and financial institutions have totake the initiative to reduce NPAs in a time bound strategic approach.Lepley, William (1998) in his article “Systematic Risk, Total risk and bank risk assessment”states that in bank finance, the risk assessment of individual loans appears to be based ontotal risk rather than systematic risk. Research found that total risk will reduce firm value byquicker liquidation leading to bankruptcy. 13 Alliance Business Academy
  • 14. Giampaola, Gabbi (2000) in his article “Measuring liquidity risk on a Banking” states that tomitigate risk, a comparison between the potential loss produced by the individual financialpositions using VAR, it is possible to figure the capital required to bear maximum loss. Theintegration of financial flows makes it possible to find a higher efficient frontier.Thirwell, John (2002) in his article “Operational risk, the banks and the regulators struggle”states that the research was conducted to know the awareness of the banks about theoperational risk and its management. The research found that the operational risk is not themean of distribution curve. It is the level of future loss.Fthemi, Ali and Fooladi, Iraj (2006) in their article “Credit risk management- A survey ofpractices” states that the purpose is to shed light on current practices of financial institutions.The research found that identifying counter party default risk is the single most importantpurpose served by the credit risk models. Only few banks use vendor-marketed model formanaging credit risk.Waseem, Ahmed (2006) in his article “Non-Performing Assets (NPAs) in Banks” states thatwith the liberalization of economy, banking industry is facing several challenges giving riseto NPAs. It depends on the quality of the credit risk management of banks. NPAs have directimpact on banks profitability, building up stress on management.Pillai, Manoj (2007) in his article “ARCIL and management of NPAs of Indian Banks” statesthat presence of NPAs has had an adverse impact on the productivity and efficiency of Indianbanks resulted in erosion of profits. The research found that during last 4 years the aggregateadvances increased by 104% but NPAs has reduced, and gives this credit to establishment ofARCIL.In 2009 Article “Are Banks stock sensitive to risk management?” states that the riskmanagement capabilities of banks have been improving overtime except for its last two years.The return through stocks is sensitive to risk management capabilities of banks.Article in livemint(2010)Mumbai: The Reserve Bank of India (RBI) has asked banks toprovide sector-wise details of their non-performing assets and exposures in the balance sheetsfrom this fiscal. The banks have also been asked to furnish details of any special purposevehicles sponsored by the banks. 14 Alliance Business Academy
  • 15. According to analysts, the move would bring in more transparency in the banks‟operations.“It has been decided to prescribe the following additional disclosures in the „notesto accounts‟ in the banks‟ balance sheets...(like) concentration of deposits, advances,exposures and NPAs, sector-wise NPAs, overseas assets, NPAs and revenue, off-balancesheet SPVs sponsored by banks,” RBI said in an statement.Public sector banks figure prominently in the debate not only because they dominate thebanking industries, but also since they have much larger NPAs compared with the privatesector banks. This raises a concern in the industry and academia because it is generally feltthat NPAs reduce the profitability of banks, weaken its financial health and erode itssolvency. For the recovery of NPAs a broad framework has evolved for the managementof NPAs under which several options are provided for debt recovery and restructuring.Banks and FIs have the freedom to design and implement their own policies for recovery andwrite-off incorporating compromise and negotiated settlements.2.3 STATEMENT OF THE PROBLEM:“Comparative Analysis on Non Performing Assets Of Private And Public Sector Banks”“While The Banking Industry in India is progressively complying with the internationalprudential norms and Accounting practices, there are certain areas like recovery managementin which it does not have a legal playing field as compared to other participants in theInternational financial markets”2.4 NEED AND IMPORTANCE OF THE STUDY  The Banks and Financial Institutions have been burdened with ever increasing Non Performing Assets.  The recovery method of collection NPAs is not appropriate. 15 Alliance Business Academy
  • 16. 2.5 OBJECTIVES OF THE STUDY:The basic idea behind undertaking the Grand Project on NPA was to:  To evaluate NPAs (Gross and Net) in different banks.  To study the past trends of NPA  To calculate the weighted of NPA in risk management in Banking  To analyze financial performance of banks at different level of NPA  To evaluate profitability positions of banks  To evaluate NPA level in different economic situation.  To Know the Concept of Non Performing Asset  To Know the Impact of NPAs  To Know the Reasons for NPAs  To learn Preventive Measures2.6 SCOPE OF THE STUDY:  Concept of Non Performing Asset  Guidelines  Impact of NPAs  Reasons for NPAs  Preventive Measures 16 Alliance Business Academy
  • 17. 2.7 OPERATIONAL DEFINITIONS:  NPA: An asset is classified as non-performing asset (NPA‟s) if dues in the form of principal and interest are not paid by the borrower for a period of 90 days.  Standard Assets: Such an asset is not a non-performing asset. In other words, it carries not more than normal risk attached to the business.  Sub-standard Assets: It is classified as non-performing asset for a period not exceeding 18 months.  Doubtful Assets: Asset that has remained NPA for a period exceeding 18 months is a doubtful asset.  Loss Assets: Here loss is identified by the banks concerned or by internal auditors or by external auditors or by Reserve Bank India (RBI) inspection  Statutory Liquidity Ratio (SLR): It is the one which every banking company shall maintain in India in the form of cash, gold or unencumbered approved securities, an amount which shall not, at the close of business on any day be less than such percentage of the total of its demand and time liabilities in India as on the last Friday of the second preceding fortnight, as the Reserve Bank of India (RBI) may specify from time to time.  Cash Reserve Ratio (CRR): It is the reserve which the banks have to maintain with itself in the form of cash reserves or by way of current account with the Reserve Bank of India (RBI), computed as a certain percentage of its demand and time liabilities. The objective is to ensure the safety and liquidity of the deposits with the banks.2.8 RESEARCH METHODOLOGY Type of Research: The research methodology adopted for carrying out the study were  In this project Descriptive research methodologies were use.  At the first stage theoretical study is attempted. 17 Alliance Business Academy
  • 18.  At the second stage Historical study is attempted.  At the Third stage Comparative study of NPA is undertaken. Type of Data: Secondary Data Source of data collection: Websites, Research Articles2.9 Limitations of the study:  It was critical for me to gather the financial data of the every bank of the Public Sector Banks so the better evaluations of the performance of the banks are not possible  Since the Indian banking sector is so wide so it was not possible for me to cover all the banks of the Indian banking sector. 18 Alliance Business Academy
  • 19. 3. Industry profile3.1Definition of Banking“In general terms, the business activity of accepting and safeguarding money owned byother individuals andentities, and then lending out this money in order toearn a profit.”Bank - An organization, usually a corporation, chartered by a state or federal government,which does most or all of the following:... MoreDeposit - Money given in advance to show intention to complete the purchase of a property.Loan - An arrangement in which a lender gives money or property to a borrower, and theborrower agrees to return the property or repay“A bank is a financial intermediary that accepts deposits and channels those deposits intolending activities. Banks are a fundamental component of the financial system, and are alsoactive players in financial markets. The essential role of a bank is to connect thosewho have capital (such as investors or depositors), with those who seek capital (such asindividuals wanting a loan, or businesses wanting to grow)”Section 6 of Banking Regulations Act, 1949 elaborately specifies the other forms of businesswhich a banking company may carry in addition to banking as defined in section 5. Some ofthese are mentioned below:  Issuing Demand Drafts & Travellers Cheques  Collection of Cheques, Bills of exchange 19 Alliance Business Academy
  • 20.  Discounting and purchase of Bills  Issuing Letters of Credit & Letters of Guarantee  Sale and Purchase of Foreign Exchange  Custodial Services  Investment services3.2 HISTORY OF INDIAN BANKINGA bank is a financial institution that provides banking and other financial services. By theterm bank is generally understood an institution that holds a Banking Licenses. Bankinglicenses are granted by financial supervision authorities and provide rights to conduct themost fundamental banking services such as accepting deposits and making loans. There arealso financial institutions that provide certain banking services without meeting the legaldefinition of a bank, a so-called Non-bank. Banks are a subset of the financial servicesindustry.The word bank is derived from the Italian banca, which is derived from German and meansbench. The terms bankrupt and "broke" are similarly derived from banca rotta, which refersto an out of business bank, having its bench physically broken. Moneylenders in NorthernItaly originally did business in open areas, or big open rooms, with each lender working fromhis own bench or table.Typically, a bank generates profits from transaction fees on financial services or the interestspread on resources it holds in trust for clients while paying them interest on the asset.Development of banking industry in India followed below stated steps.  Banking in India has its origin as early as the Vedic period. It is believed that the transition from money lending to banking must have occurred even before Manu, the great Hindu Jurist, who has devoted a section of his work to deposits and advances and laid down rules relating to rates of interest.  Banking in India has an early origin where the indigenous bankers played a very important role in lending money and financing foreign trade and commerce. During 20 Alliance Business Academy
  • 21. the days of the East India Company, was the turn of the agency houses to carry on the banking business. The General Bank of India was first Joint Stock Bank to be established in the year 1786. The others which followed were the Bank Hindustan and the Bengal Bank. In the first half of the 19th century the East India Company established three banks; the Bank of Bengal in 1809, the Bank of Bombay in 1840 and the Bank of Madras in 1843. These three banks also known as Presidency banks were amalgamated in 1920 and a new bank, the Imperial Bank of India was established in 1921. With the passing of the State Bank of India Act in 1955 the undertaking of the Imperial Bank of India was taken by the newly constituted State Bank of India. The Reserve Bank of India which is the Central Bank was created in 1935 by passing Reserve Bank of India Act, 1934 which was followed up with the Banking Regulations in 1949. These acts bestowed Reserve Bank of India (RBI) with wide ranging powers for licensing, supervision and control of banks. Considering the proliferation of weak banks, RBI compulsorily merged many of them with stronger banks in 1969. The three decades after nationalization saw a phenomenal expansion in the geographical coverage and financial spread of the banking system in the country. As certain rigidities and weaknesses were found to have developed in the system, during the late eighties the Government of India felt that these had to be addressed to enable the financial system to play its role in ushering in a more efficient and competitive economy. Accordingly, a high-level committee was set up on 14 August 1991 to examine all aspects relating to the structure, organization, functions and procedures of the financial system. Based on the recommendations of the Committee (Chairman: Shri M. Narasimham), a comprehensive reform of the banking system was introduced in 1992-93. The objective of the reform measures was to ensure that the balance sheets of banks reflected their actual financial health. One of the important measures related to income recognition, asset classification and provisioning by banks, on the basis of objective criteria was laid down by the Reserve Bank. The introduction of capital adequacy norms in line with international standards has been another important measure of the reforms process. 21 Alliance Business Academy
  • 22. 1. Comprises balance of expired loans, compensation and other bonds such as National Rural Development Bonds and Capital Investment Bonds. Annuity certificates are excluded. 2. These represent mainly non- negotiable non- interest bearing securities issued to International Financial Institutions like International Monetary Fund, International Bank for Reconstruction and Development and Asian Development Bank. 3. At book value. 4. Comprises accruals under Small Savings Scheme, Provident Funds, Special Deposits of Non- Government In the post-nationalization era, no new private sector banks were allowed to be set up. However, in 1993, in recognition of the need to introduce greater competition which could lead to higher productivity and efficiency of the banking system, new private sector banks were allowed to be set up in the Indian banking system. These new banks had to satisfy among others, the following minimum requirements: (i) It should be registered as a public limited company; (ii) The minimum paid-up capital should be Rs 100 crore; (iii) The shares should be listed on the stock exchange; (iv) The headquarters of the bank should be preferably located in a centre which does not have the headquarters of any other bank; and (v) The bank will be subject to prudential norms in respect of banking operations, accounting and other policies as laid down by the RBI. It will have to achieve capital adequacy of eight per cent from the very beginning. A high level Committee, under the Chairmanship of Shri M. Narasimham, was constituted by the Government of India in December 1997 to review the record of implementation of financial system reforms recommended by the CFS in 1991 and 22 Alliance Business Academy
  • 23. chart the reforms necessary in the years ahead to make the banking system stronger and better equipped to compete effectively in international economic environment. The Committee has submitted its report to the Government in April 1998. Some of the recommendations of the Committee, on prudential accounting norms, particularly in the areas of Capital Adequacy Ratio, Classification of Government guaranteed advances, provisioning requirements on standard advances and more disclosures in the Balance Sheets of banks have been accepted and implemented. The other recommendations are under consideration.  The banking industry in India is in a midst of transformation, thanks to the economic liberalization of the country, which has changed business environment in the country. During the pre-liberalization period, the industry was merely focusing on deposit mobilization and branch expansion. But with liberalization, it found many of its advances under the non-performing assets (NPA) list. More importantly, the sector has become very competitive with the entry of many foreign and private sector banks. The face of banking is changing rapidly. There is no doubt that banking sector reforms have improved the profitability, productivity and efficiency of banks, but in the days ahead banks will have to prepare themselves to face new challenges.Indian Banking: Key Developments1969  Government acquires ownership in major banks  Almost all banking operations in manual mode  Some banks had Unit record Machines of IBM for IBR & Pay roll1970- 1980  Unprecedented expansion in geographical coverage, staff, business & transaction volumes and directed lending to agriculture, SSI & SB sector  Manual systems struggle to handle exponential rise in transaction volumes --  Outsourcing of data processing to service bureau begins  Back office systems only in Multinational (MNC) banks offices 23 Alliance Business Academy
  • 24. 1981- 1990  Regulator (read RBI) led IT introduction in Banks  Product level automation on stand alone PCs at branches (ALPMs)  In-house EDP infrastructure with Unix boxes, batch processing in Cobol for MIS.  Mainframes in corporate office1991-1995  Expansion slows down  Banking sector reforms resulting in progressive de-regulation of banking, introduction of prudential banking norms entry of new private sector banks  Total Branch Automation (TBA) in Govt. owned and old private banks begins  New private banks are set up with CBS/TBA form the start1996-2000  New delivery channels like ATM, Phone banking and Internet banking and convenience of any branch banking and auto sweep products introduced by new private and MNC banks  Retail banking in focus, proliferation of credit cards  Communication infrastructure improves and becomes cheap. IDRBT sets up VSAT network for Banks  Govt. owned banks feel the heat and attempt to respond using intermediary technology, TBA implementation surges ahead under fiat from Central Vigilance  Commission (CVC), Y2K threat consumes last two years 24 Alliance Business Academy
  • 25. 2000-2003  Alternate delivery channels find wide consumer acceptance  IT Bill passed lending legal validity to electronic transactions  Govt. owned banks and old private banks start implementing CBSs, but initial attempts face problems  Banks enter insurance business launch debit cards3.3 Initial Phase of Nationalization:Government implemented the exercise of nationalization of significant part of the IndianBanking system in the year 1955, when Imperial Bank of India was Nationalized in that yearfor the stated objective of "extension of banking facilities on a large scale, more particularlyin the rural and semi-urban areas, and for diverse other public purposes" to form State Bankof India. SBI was to act as the principal agent of the RBI and handle banking transactions ofthe Union & State Governments throughout India. The step was in fact in furtherance of theobjectives of supporting a powerful rural credit cooperative movement in India and asrecommended by the "The All-India Rural Credit Survey Committee Report, 1954". StateBank of India was obliged to open an accepted number of branches within 5 years inunbanked centres. The seven banks now forming subsidiaries of SBI were nationalized in theyear 1960. This brought one-third of the banking segment under the direct control of theGovernment of India.The major process of nationalization was carried out on 19th July 1969, when the PrimeMinister of India, Mrs. Indira Gandhi announced the nationalization of 14 major commercialbanks in the country. One more phase of nationalization was carried out in the year 1980,when seven more banks were nationalized. This brought 80% of the banking segment in Indiaunder Government ownership. The country entered the second phase, i.e. the phase ofNationalized Banking with emphasis on Social Banking in 1969/70.3.4 TYPES OF BANKS AND THERE INTRODUCTION3.4.1PUBLIC BANKS:  DENA Bank 25 Alliance Business Academy
  • 26.  Punjab National Bank  Union Bank Of India  Bank Of Baroda  Bank Of India3.4.2 PRIVATE BANKS:  ICICI Banks  KOTAK Mahindra Banks  AXIS Bank  HDFC Banks  INDUSIND Banks3.4.3Private sector Banks IntroductionICICI Bank:ICICI Bank is the largest private sector bank in India. To understand about this big bank,we need to understand how it became so big a force to reckon with. ICICI (Industrial CreditInvestment Corporation of India) promoted the ICICI bank in 1994 with its stake reducing to46% after the IPO in 1998. ICICI is a well-known name in India along with IDBI and wasformed in 1955 at the initiative of the World Bank, Indian Government and Indian Industries.Both of these institutions have an exceptional brand-image and one of the highest possibleratings from CRISIL and other rating organizations. ICICI can be considered an oligopolisticcorporation along with IDBI (please M2M me, if you want to discuss this!). ICIC listed inNYSE in 2000. In 2001 it underwent a tight marriage with Bank of Madura in a stock-onlyamalgamation. This was a tough marriage and I guess they are still suffering from thishiccup, which kind of substantiates their mediocre performance today, in my perspective.This and the merger with the ICICI Corporation have caused some management strain andsome tough merger time. I could only wish they come over this and serve the customers in abetter manner. 26 Alliance Business Academy
  • 27. Kotak Mahindra Bank:Kotak Mahindra is one of Indias leading financial organizations, offering a wide range offinancial services that encompass every sphere of life. From commercial banking, to stockbroking, to mutual funds, to life insurance, to investment banking, the group caters to thediverse financial needs of individuals and corporate.The group has a net worth of over Rs. 7,100crore and has a distribution network of branches,franchisees, representative offices and satellite offices across cities and towns in India andoffices in New York, London, San Francisco, Dubai, Mauritius and Singapore. The Groupservices around 6.5 million customer accounts.The Kotak Mahindra Group was born in 1985 as Kotak Capital Management FinanceLimited. This company was promoted by Uday Kotak, Sidney A. A. Pinto and Kotak &Company. Industrialists Harish Mahindra and Anand Mahindra took a stake in 1986, andthats when the company changed its name to Kotak Mahindra Finance Limited.AXIS Bank:Axis Bank was the first of the new private banks to have begun operations in 1994, after theGovernment of India allowed new private banks to be established. The Bank was promotedjointly by the Administrator of the specified undertaking of the Unit Trust of India (UTI - I),Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC)and other four PSU insurance companies, i.e. National Insurance Company Ltd., The NewIndia Assurance Company Ltd., The Oriental Insurance Company Ltd. and United IndiaInsurance Company Ltd.The Bank today is capitalized to the extent of Rs. 405.17crores with the public holding (otherthan promoters and GDRs) at 53.09%.The Banks Registered Office is at Ahmadabad and its Central Office is located at Mumbai.The Bank has a very wide network of more than 1000 branches and Extension Counters (ason 31st March 2010). The Bank has a network of over 4055 ATMs (as on 31st March 2010)providing 24 hrs a day banking convenience to its customers. This is one of the largest ATMnetworks in the country. The Bank has strengths in both retail and corporate banking and is 27 Alliance Business Academy
  • 28. committed to adopting the best industry practices internationally in order to achieveexcellence.HDFC Bank:The Housing Development Finance Corporation Limited (HDFC) was amongst the first toreceive an in principle approval from the Reserve Bank of India (RBI) to set up a bank in theprivate sector, as part of the RBIs liberalization of the Indian Banking Industry in 1994. Thebank was incorporated in August 1994 in the name of HDFC Bank Limited, with itsregistered office in Mumbai, India. HDFC Bank commenced operations as a ScheduledCommercial Bank in January 1995.HDFC Banks mission is to be a World-Class Indian Bank. The objective is to build soundcustomer franchises across distinct businesses so as to be the preferred provider of bankingservices for target retail and wholesale customer segments, and to achieve healthy growth inprofitability, consistent with the banks risk appetite. The bank is committed to maintain thehighest level of ethical standards, professional integrity, corporate governance and regulatorycompliance. HDFC Banks business philosophy is based on four core values - OperationalExcellence, Customer Focus, Product Leadership and People.As on 31st March, 2010 the authorized share capital of the Bank is Rs. 550crore. The paid-upcapital as on said date is Rs. 457,74,32,720/- (45,77,43,272 equity shares of Rs. 10/- each).The HDFC Group holds 23.73 % of the Banks equity and about 16.97 % of the equity is heldby the ADS Depository (in respect of the banks American Depository Shares (ADS) Issue).26.59 % of the equity is held by Foreign Institutional Investors (FIIs)..The shares are listed on the Bombay Stock Exchange Limited and The National StockExchange of India Limited. The Banks American Depository Shares (ADS) are listed on theNew York Stock Exchange (NYSE) under the symbol HDB and the Banks GlobalDepository Receipts (GDRs) are listed on Luxembourg Stock Exchange under ISIN NoUS40415F2002.INDUSIND Bank: 28 Alliance Business Academy
  • 29. IndusInd Bank derives its name and inspiration from the Indus Valley civilisation - a culturedescribed by National Geographic as one of the greatest of the ancient world combining aspirit of innovation with sound business and trade practices.Mr. Srichand P. Hinduja, a leading Non-Resident Indian businessman and head of theHinduja Group, conceived the vision of IndusInd Bank - the first of the new-generationprivate banks in India - and through collective contributions from the NRI communitytowards Indias economic and social development, brought our Bank into being.The Bank, formally inaugurated in April 1994 by Dr. Manmohan Singh, Honourable PrimeMinister of India who was then the country‟s Finance Minister, started with a capital base ofRs.1,000 million (USD 32 million at the prevailing exchange rate), of which Rs.600 millionwas raised through private placement from Indian Residents while the balance Rs.400 million(USD 13 million) was contributed by Non-Resident Indians.IndusInd Bank is one of the new generation private-sector banks in India, which commencedits operations in 1994. The Bank caters to the needs of both Consumer & Corporate Clientsand has a robust technology platform supporting multi – channel delivery capabilities. TheBank enjoys a patronage of 2 million customers and has a network of 209 branches and 427ATMs spread over 168 geographical locations in 28 states and union territories across thecountry. The Bank also has a Representative Office in Dubai and London.The Bank‟s total business (deposits plus advances) as on December 31, 2009 crossed Rs.43,000 crore. The Bank is driven by state-of-the-art technology since its inception. It hasmulti-lateral tie-ups with other banks providing access to more than 21000 ATMs for itscustomers. It enjoys clearing bank status for both major stock exchanges - BSE and NSE -and three major commodity exchanges in the country – MCX, NCDEX, and NMCE. It alsooffers DP facilities for stock and commodity segments. The Bank has been bestowed with themandate of being a Settlement Banker for tea auctions at Kolkata, Siliguri, Coonoor,Coimbatore and Guwahati.During the quarter, in a pioneering initiative in „Green Banking‟ the Bank became the firstbank in Maharashtra to open a solar-power ATM. Subjects like sustainable development, 29 Alliance Business Academy
  • 30. social responsibility and climate change are fast becoming part of the corporate vocabularyand IndusInd is at the forefront of this change in the Indian banking sector.The Bank has been awarded the highest P1+ rating for its Fixed Deposits and Certificates ofDeposit by CRISIL. Recently, CRISIL has reaffirmed its P1+ rating of IndusInd Bank‟s fixeddeposits and certificates of deposit program. The rating continues to reflect the Bank‟sestablished presence in the Commercial Vehicle (CV) financing business and the significantimprovement in its asset quality. The rating also features in the Bank‟s modest resource andearnings profile, and average capitalization levels.3.4.4 PUBLIC BANKS:DENA Bank:Dena Bank was founded o n 26th May, 1938 by the family of Devkaran Nanjee under thename Devkaran Nanjee Banking Company Ltd.It became a Public Ltd. Company in December 1939 and later the name was changed to DenaBank Ltd.In July 1969 Dena Bank Ltd. along with 13 other major banks was nationalized and is now aPublic Sector Bank constituted under the Banking Companies (Acquisition & Transfer ofUndertakings) Act, 1970. Under the provisions of the Banking Regulations Act 1949, inaddition to the business of banking, the Bank can undertake other business as specified inSection 6 of the Banking Regulations Act, 1949.MilestonesüOne among six Public Sector Banks selected by the World Bank for sanctioning a loan ofRs.72.3crores for augmentation of Tier-II Capital under Financial Sector Developmentalproject in the year 1995. One among the few Banks to receive the World Bank loan for technological up gradation and training. 30 Alliance Business Academy
  • 31. Launched a Bond Issue of Rs.92.13crores in November 1996. Maiden Public Issue of Rs.180Crores in November 1996. Introduced Tele banking facility of selected metropolitan centers.Dena Bank has been the first Bank to introduce: Minor Savings Scheme. Credit card in rural India known as "DENA KRISHI SAKH PATRA" (DKSP). Drive-in ATM counter of Juhu, Mumbai. Smart card at selected branches in Mumbai. Customer rating system for rating the Bank Services.PUNJAB NATIONAL BANK:Punjab National Bank (PNB) (BSE: 532461), was registered on May 19, 1894 under theIndian Companies Act with its office in Anarkali Bazaar Lahore. Today, the Bank is thesecond largest government-owned commercial bank in India with about 5000 branches across764 cities. It serves over 37 million customers. The bank has been ranked 248th biggest bankin the world by the Bankers Almanac, London. The banks total assets for financial year 2007were about US$60 billion. PNB has a banking subsidiary in the UK, as well as branchesin Hong Kong, Dubai and Kabul, and representative offices in Almaty,Dubai, Oslo,and Shanghai.History:1895: PNB commenced its operations in Lahore. PNB has the distinction of being the firstIndian bank to have been started solely with Indian capital that has survived to the present.(The first entirely Indian bank, the Oudh Commercial Bank, was established in 1881in Faizabad, but failed in 1958.) PNBs founders included several leaders ofthe Swadeshi movement such as Dyal Singh Majithia and Lala HarKishen Lal,[1] Lala 31 Alliance Business Academy
  • 32. Lalchand, Shri Kali Prosanna Roy, Shri E.C. Jessawala, Shri Prabhu Dayal, Bakshi JaishiRam, and Lala Dholan Dass. Lala Lajpat Rai was actively associated with the management ofthe Bank in its early years.1904: PNB established branches in Karachi and Peshawar.1940: PNB absorbed Bhagwan Dass Bank, a scheduled bank located in Delhi circle.1947: Partition of India and Pakistan at Independence. PNB lost its premises in Lahore, butcontinued to operate in Pakistan.1951: PNB acquired the 39 branches of Bharat Bank (est. 1942); Bharat Bank became BharatNidhi Ltd.1961: PNB acquired Universal Bank of India.1963: The Government of Burma nationalized PNBs branch in Rangoon (Yangon).September 1965: After the Indo-Pak war the government of Pakistan seized all the offices inPakistan of Indian banks, including PNBs head office, which may have moved to Karachi.PNB also had one or more branches in East Pakistan (Bangladesh).1960s: PNB amalgamated Indo Commercial Bank (est. 1933) in a rescue.1969: The Government of India (GOI) nationalized PNB and 13 other major commercialbanks, on July 19, 1969.1976 or 1978: PNB opened a branch in London.1986 The Reserve Bank of India required PNB to transfer its London branch to State Bank ofIndia after the branch was involved in a fraud scandal.1986: PNB acquired Hindustan Commercial Bank (est. 1943) in a rescue. The acquisitionadded Hindustans 142 branches to PNBs network.1993: PNB acquired New Bank of India, which the GOI had nationalized in 1980.1998: PNB set up a representative office in Almaty, Kazakhstan. 32 Alliance Business Academy
  • 33. 2003: PNB took over Nedungadi Bank, the oldest private sector bank in Kerala. At the timeof the merger with PNB, Nedungadi Banks shares had zero value, with the result that itsshareholders received no payment for their shares.PNB also opened a representative office in London.2004: PNB established a branch in Kabul, Afghanistan.PNB also opened a representative office in Shanghai.PNB established an alliance with Everest Bank in Nepal that permits migrants to transferfunds easily between India and Everest Banks 12 branches in Nepal.2005: PNB opened a representative office in Dubai.2007: PNB established PNBIL - Punjab National Bank (International) - in the UK, with twooffices, one in London, and one in South Hall. Since then it has opened a third branch inLeicester, and is planning a fourth in Birmingham.2008: PNB opened a branch in Hong Kong.2009: PNB opened a representative office in Oslo, Norway, and a second branch in HongKong, this in Kowloon.2010: PNB received permission to upgrade its representative office in the Dubai InternationalFinancial Centre to a branch.UNION BANK OF INDIA:The dawn of twentieth century witnesses the birth of a banking enterprise par excellence-UNION BANK OF INDIA- that was flagged off by none other than the Father of theNation, Mahatma Gandhi. Since that the golden moment, Union Bank of India has this farunflinchingly traveled the arduous road to successful banking a journey that spans 88 years.We at Union Bank of India, reiterate the objective of our inception to the profound thoughtsof the great Mahatma... "We should have the ability to carry on a big bank, to manageefficiently crores of rupees in the course of our national activities. Though we have notmany banks amongst us, it does not follow that we are not capable of efficiently 33 Alliance Business Academy
  • 34. managing crores and tens of crores of rupees."Union Bank of India is firmly committed to consolidating and maintaining its identity as aleading, innovative commercial Bank, with a proactive approach to the changing needs ofthe society. This has resulted in a wide gamut of products and services, made available to itsvaluable clientele in catering to the smallest of their needs. Today, with its efficient, value-added services, sustained growth, consistent profitability and development of newtechnologies, Union Bank has ensured complete customer delight, living up to its imageof, “GOOD PEOPLE TO BANK WITH”. Anticipative banking- the ability to gauge thecustomers needs well ahead of real-time - forms the vital ingredient in value-based servicesto effectively reduce the gap between expectations and deliverables.The key to the success of any organization liew with its people. No wonder, Union Banksunique family of about 26,000 qualified / skilled employees is and ever will be dedicatedand delighted to serve the discerning customer with professionalism and wholeheartedness.Union Bank is a Public Sector Unit with 55.43% Share Capital held by the Government ofIndia. The Bank came out with its Initial Public Offer (IPO) in August 20, 2002 and Followon Public Offer in February 2006. Presently 44.57 % of Share Capital is presently held byInstitutions, Individuals and Others.Over the years, the Bank has earned the reputation of being a techno-savvy and is a frontrunner among public sector banks in modern-day banking trends. It is one of the pioneerpublic sector banks, which launched Core Banking Solution in 2002. Under this solutionumbrella, All Branches of the Bank have been 1135 networked ATMs, with online Tele-banking facility made available to all its Core Banking Customers - individual as well ascorporate. In addition to this, the versatile Internet Banking provides extensive informationpertaining to accounts and facets of banking. Regular banking services apart, the customercan also avail of a variety of other value-added services like Cash Management Service,Insurance, Mutual Funds and Demat.The Bank will ever strive in its Endeavour to provide services to its customer and enhance 34 Alliance Business Academy
  • 35. its businesses thereby fulfilling its vision of becoming “the bank of first choice in ourchosen area by building beneficial and lasting relationship with customers through aprocess of continuous improvement”.BANK OF BARODA:It has been a long and eventful journey of almost a century across 25 countries. Starting in1908 from a small building in Baroda to its new hi-rise and hi-tech Baroda Corporate Centrein Mumbai is a saga of vision, enterprise, financial prudence and corporate governance.It is a story scripted in corporate wisdom and social pride. It is a story crafted in privatecapital, princely patronage and state ownership. It is a story of ordinary bankers and theirextraordinary contribution in the ascent of Bank of Baroda to the formidable heights ofcorporate glory. It is a story that needs to be shared with all those millions of people -customers, stakeholders, employees & the public at large - who in ample measure, havecontributed to the making of an institution. Our new logo is a unique representation of auniversal symbol. It comprises dual „B‟ letterforms that hold the rays of the rising sun. Wecall this the Baroda Sun.The sun is an excellent representation of what our bank stands for. It is the single mostpowerful source of light and energy – its far reaching rays dispel darkness to illuminateeverything they touch. At Bank of Baroda, we seek to be the sources that will help all ourstakeholders realize their goals. To our customers, we seek to be a one-stop, reliable partnerwho will help them address different financial needs. To our employees, we offer rewardingcareers and to our investors and business partners, maximum return on their investment.The single-color, compelling vermillion palette has been carefully chosen, for itsdistinctiveness as it stands for hope and energy.We also recognize that our bank is characterized by diversity. Our network of branches spansgeographical and cultural boundaries and rural-urban divides. Our customers come from awide spectrum of industries and backgrounds. The Baroda Sun is a fitting face for our brandbecause it is a universal symbol of dynamism and optimism – it is meaningful for our many 35 Alliance Business Academy
  • 36. audiences and easily decoded by all.Our new corporate brand identity is much more than a cosmetic change. It is a signal that werecognize and are prepared for new business paradigms in a globalised world. At the sametime, we will always stay in touch with our heritage and enduring relationships on which ourbank is founded. By adopting a symbol as simple and powerful as the Baroda Sun, we hopeto communicate both.BANK OF INDIA:Bank of India (BoI), established on 7 September 1906 is a bank with headquartersin Mumbai. Government-owned since nationalization in 1969, It is one ofIndiasleading banks, with about 3140 branches including 27 branches outside India. BoI is afounder member of SWIFT (Society for Worldwide Inter Bank FinancialTelecommunications) in India which facilitates provision of cost-effective financialprocessing and communication services. The Bank completed its first one hundred years ofoperations on 7 September 2006.Previous banks that used the name Bank of India:At least three banks having the name Bank of India had preceded the setting up of thepresent Bank of India.A person named Ramakishen Dutt set up the first Bank of India in Calcutta (now Kolkata) in1828, but nothing more is known about this bank.The second Bank of India was incorporated in London in the year 1836 as an Anglo-Indianbank.The third bank named Bank of India was registered in Bombay(now Mumbai) in the year1864.The current bank:The earlier holders of the Bank of India name had failed and were no longer in existence bythe time a diverse group of Hindus, Muslims, Parsis, and Jews helped establish the present 36 Alliance Business Academy
  • 37. Bank of India in 1906. It was the first bank in India promoted by Indian interests to serve allthe communities of India. At the time, banks in India were either owned by Europeans andserved mainly the interests of the European merchant houses, or by different communitiesand served the banking needs of their own community.The promoters incorporated the Bank of India on 7 September 1906 under Act VI of 1882with an authorized capital of Rs. 1crore divided into 100,000 shares each of Rs. 100. Thepromoters placed 55,000 shares privately, and issued 45,000 to the public by way of IPO on 3October 1906; the bank commenced operations on 1 November 1906.The lead promoter of the Bank of India was Sir Sassoon J. David (1849-1926). He was amember of the community of Baghdadi Jews, which was notable for its history of socialservice and included theSassoons. He was a prudent banker, and remained the ChiefExecutive of the bank from its founding in 1906 until his death in 1926.The first board of directors of the bank consisted of Sir Sassoon David, Sir CowasjeeJehangir, J. Cowasjee Jehangir, Sir Frederick Leigh Croft, Ratanjee Dadabhoy Tata,Gordhandas Khattau, Lalubhai Samaldas, Khetsety Khiasey, Ramnarain Hurnundrai,Jenarrayen Hindoomull Dani, Noordin Ebrahim Noordin.3.5 NPAs IN INDIAN BANKING SYSTEM:Undoubtedly the world economy has slowed down, recession is at its peak, globally stockmarkets have tumbled and business itself is getting hard to do. The Indian economy has beenmuch affected due to high fiscal deficit, poor infrastructure facilities, sticky legal system,cutting of exposures to emerging markets by FIs, etc.Further, international rating agencies like, Standard & Poor have lowered India‟s creditrating to sub-investment grade. Such negative aspects have often outweighed positives suchas increasing for ex-reserves and a manageable inflation rate.Under such a situation, it goes without saying that banks are no exception and are bound toface the heat of a global downturn. One would be surprised to know that the banks and 37 Alliance Business Academy
  • 38. financial institution in India hold nonperforming assets worth Rs. 110000crores Bankers haverealized that unless the level of NPAs is reduced drastically, they will find it difficult tosurvive.NPA surfaced suddenly in the Indian banking scenario, around the Eighties, in the midst ofturbulent structural changes overtaking the international banking institutions, and when theglobal financial markets were undergoing sweeping changes. In fact after it emerged as if theproblem of NPA kept hidden and gradually swelling unnoticed and unperceived, in the mazeof defective accounting standards that still continued with Indian Banks up to the Ninetiesand opaque Balance sheets.In a dynamic world, it is true that new ideas and new concepts that emerge through suchchanges caused by social evolution bring beneficial effects, but only after levying a heavyinitial toll. The process of quickly integrating new innovations in the existing set-up leads toan immediate disorder and unsettled conditions. People are not accustomed to the newmodels. These new formations take time to configure, and work smoothly. The old is castaway and the new is found difficult to adjust. Marginal and sub-marginal operators are sweptaway by these convulsions. Banks being sensitive institutions entrenched deeply in traditionalbeliefs and conventions were unable to adjust themselves to the changes. They suffered easyvictims to this upheaval in the initial phase.Consequently banks underwent this transition-syndrome and languished under distress andbanking crises surfaced in quick succession one following the other in many countries. Butwhen the banking industry in the global sphere came out of this metamorphosis to re-adjust tothe new order, they emerged revitalized and as more vibrant and robust units. Deregulation indeveloped capitalist countries particularly in Europe, witnessed a remarkable innovativegrowth in the banking industry, whether measured in terms of deposit growth, credit growth,growth intermediation instruments as well as in network.During all these years the Indian Banking, whose environment was insulated from the globalcontext and was denominated by State controls of directed credit delivery, regulated interestrates, and investment structure did not participate in thi kars vibrant banking revolution.Suffering the dearth of innovative spirit and choking under undue regimentation, Indian 38 Alliance Business Academy
  • 39. banking was lacking objective and prudential systems of business leading from earlystagnation to eventual degeneration and reduced or negative profitability. Continued politicalinterference, the absence of competition and total lack of scientific decision-making, led toconsequences just the opposite of what was happening in the western countries.Imperfect accounting standards and opaque balance sheets served as tools for hiding theshortcomings and failing to reveal the progressive deterioration and structural weakness ofthe countrys banking institutions to public view. This enabled the nationalized banks tocontinue to flourish in a deceptive manifestation and false glitter, though stray symptoms ofthe brewing ailment were discernable here and there.The government hastily introduced the first phase of reforms in the financial and bankingsectors after the economic crisis of 1991. This was an effort to quickly resurrect the health ofthe banking system and bridge the gap between Indian and global banking development.Indian Banking, in particular PSB‟s suddenly woke up to the realities of the situation and toface the burden of the surfeit of their woes.Simultaneously major revolutionary transitions were taking place in other sectors of theeconomy on account the ongoing economic reforms intended towards freeing the Indianeconomy from government controls and linking it to market driven forces for a quickintegration with the global economy. Import restrictions were gradually freed. Tariffs werebrought down and quantitative controls were removed. The Indian market was opened forfree competition to the global players. The new economic policy in turn revolutionaries theenvironment of the Indian industry and business and put them to similar problems of newmixture of opportunities and challenges. As a result we witness today a scenario of banking,trade and industry in India, all undergoing the convulsions of total reformation battling tokick off the decadence of the past and to gain a new strength and vigor for effective linkswith the global economy. Many are still languishing unable to get released from the old set-up, while a few progressive corporate are making a niche for themselves in the globalcontext.During this decade the reforms have covered almost every segment of the financial sector. Inparticular, it is the banking sector, which experienced major reforms. The reforms have taken 39 Alliance Business Academy
  • 40. the Indian banking sector far away from the days of nationalization. Increase in the number ofbanks due to the entry of new private and foreign banks; increase in the transparency of thebanks balance sheets through the introduction of prudential norms and norms of disclosure;increase in the role of the market forces due to the deregulated interest rates, together withrapid computerization and application of the benefits of information technology to bankingoperations have all significantly affected the operational environment of the Indian bankingsector.In the background of these complex changes when the problem of NPA was belatedlyrecognized for the first time at its peak velocity during 1992-93, there was resultant chaos andconfusion. As the problem in large magnitude erupted suddenly banks were unable to analyzeand make a realistic or complete assessment of the surmounting situation. It was not realizedthat the root of the problem of NPA was cantered elsewhere in multiple layers, as muchoutside the banking system, more particularly in the transient economy of the country, aswithin. Banking is not a compartmentalized and isolated sector delinked from the rest of theeconomy. As has happened elsewhere in the world, a distressed national economy shifts apart of its negative results to the banking industry.In short, banks are made ultimately to finance the losses incurred by constituent industriesand businesses. The unpreparedness and structural weakness of our banking system to act tothe emerging scenario and de-risk itself to the challenges thrown by the new order, trying toswitch over to globalization were only aggravating the crisis. Partial perceptions and hastyjudgments led to a policy of ad-hoc-ism, which characterized the approach of the authoritiesduring the last two-decades towards finding solutions to banking ailments and dismantlingrecovery impediments. Continuous concern was expressed. Repeated correctional effortswere executed, but positive results were evading. The problem was defying a solution.The threat of NPA was being surveyed and summarized by RBI and Government of Indiafrom a remote perception looking at a birds-eye-view on the banking industry as a wholedelinked from the rest of the economy. RBI looks at the banking industrys average on amacro basis, consolidating and tabulating the data submitted by different institutions. It hascollected extensive statistics about NPA in different financial sectors like commercial banks, 40 Alliance Business Academy
  • 41. financial institutions, urban cooperatives, NBFC etc. But still it is a distant view of oneoutside the system and not the felt view of a suffering participant. Individual banks inheritdifferent cultures and they finance diverse sectors of the economy that do not possessidentical attributes. The scenario is not so simple to be generalized for the industry as a wholeto prescribe a readymade package of a common solution for all banks and for all times.3.6 REASONS FOR THE EXISTENCE OF HUGE LEVEL OF NPAS INTHE INDIAN BANKING SYSTEM (IBS):The origin of the problem of burgeoning NPA‟s lies in the quality of managing credit risk bythe banks concerned. What is needed is having adequate preventive measures in placenamely, fixing pre-sanctioning appraisal responsibility and having an effective post-disbursement supervision. Banks concerned should continuously monitor loans to identifyaccounts that have potential to become non-performing.To start with, performance in terms of profitability is a benchmark for any business enterpriseincluding the banking industry. However, increasing NPA‟s have a direct impact on banksprofitability as legally banks are not allowed to book income on such accounts and at thesame time banks are forced to make provision on such assets as per the Reserve Bank ofIndia (RBI) guidelines. Also, with increasing deposits made by the public in the bankingsystem, the banking industry cannot afford defaults by borrowers since NPA‟s affects therepayment capacity of banks.Further, Reserve Bank of India (RBI) successfully creates excess liquidity in the systemthrough various rate cuts and banks fail to utilize this benefit to its advantage due to the fearof burgeoning non-performing assets.Some of the reasons are:  After the nationalization of banks sector wise allocation of credit disbursements became compulsory. 41 Alliance Business Academy
  • 42.  Banks were compelled to give credit to even those sectors, which were not considered to be very profitable, keeping in mind the federal policy. People in the agricultural sector were hardly interested in returning the loans as they were confident that the loans with the interest would be written off by the successive governments. The small scale industries also availed credit even though they were not sure of performing to the extent of returning the loans. Banks were also not in the position to press enough securities to cover the loans in calls of timings. Even if the assets were provided they proved to be substandard assets as the values that could be realized were very low. The slackness in effort by the bank authorities to collect or recover loan advances in time also contributes to the increase in NPA‟s. Lack of accountability of the officers, who sanctioned the loans led to a caste whole approach by the officers recovering the loans. Loans sanctioned to under servicing candidates due to pressure from the ministers and other politicians also led to the non recovery of debts. Poor credit appraisal system, lack of vision while sanctioning credit limits. Lack of proper monitoring. Reckless advances to achieve the budgetary targets. Lack of sincere corporate culture, inadequate legal provisions on foreclosure and bankruptcy. Change in economic policies/environment. Lack of co-ordination between banks.Some of the internal factors of the organization leading to NPA‟s are: Division of funds for expansion, diversification, modernization, undertaking new projects and for helping associate concerns, this is coupled with recessionary trends and failure to tap funds in the capital and debt markets. Business failure( product, marketing etc.,),inefficient management, strained labor relations, inappropriate technology, technical problems, product obsolescence etc., 42 Alliance Business Academy
  • 43.  Recession , shortage of input, power shortage, price escalation, accidents, natural calamities, besides externalization problem in other countries leading to non payment of over dues.  Time/cost overrun during the project implementation stage.  Government policies like changes in the excise duties, pollution control orders.  Wilful default, siphoning off of funds, fraud, misappropriation, promoters/directors disputes etc.  Deficiencies on the part of the banks like delay in release of limits and delay in release of payments/subsidies by the government.3.7 RBI GUIDELINES ON INCOME RECOGNITION (INTERESTINCOME ON NPA‟s)In the peak crisis period in early Nineties, when the first Series of Banking Reforms wereintroduced, the working position of the State-owned banks exhibited the severest strain.Commenting on this situation the Reserve Bank of India has pointed out as under:"Till the adoption of prudential norms relating to income recognition, asset classification,provisioning and capital adequacy, twenty-six out of twenty-seven public sector banks werereporting profits (UCO Bank was incurring losses from 1989-90). In the first post-reformyear, i.e., 1992-93, the profitability of the PSB‟s as a group turned negative with as many astwelve nationalized banks reporting net losses. By March 1996, the outer time limitprescribed for attaining capital adequacy of 8 per cent, eight public sector banks were stillshort of the prescribed."Consequently PSB‟s in the post reform period came to be classified under three categories as-  Healthy banks (those that are currently showing profits and hold no accumulated losses in their balance sheet) 43 Alliance Business Academy
  • 44.  Banks showing currently profits, but still continuing to have accumulated losses of prior years carried forward in their balance sheets  Banks which are still in the red, i.e. showing losses in the past and in the present.Banks recognize income including interest income on advances on accrual basis. That is,income is accounted for as and when it is earned. The prima-facie condition for accrual ofincome is that it should not be unreasonable to expect its ultimate collection. However,NPA‟s involves significant uncertainty with respect to its ultimate collection.Considering this fact, in accordance with the guidelines for income recognition issued by theReserve Bank of India (RBI), banks should not recognize interest income on such NPA‟suntil it is actually realized.3.7.1 Income recognition – Policy  The policy of income recognition has to be objective and based on the record of recovery. Internationally income from non-performing assets (NPA) is not recognised on accrual basis but is booked as income only when it is actually received. Therefore, the banks should not charge and take to income account interest on any NPA.  However, interest on advances against term deposits, NSCs, IVPs, KVPs and Life policies may be taken to income account on the due date, provided adequate margin is available in the accounts.  Fees and commissions earned by the banks as a result of re-negotiations or rescheduling of outstanding debts should be recognised on an accrual basis over the period of time covered by the re-negotiated or rescheduled extension of credit.  If Government guaranteed advances become NPA, the interest on such advances should not be taken to income account unless the interest has been realised.3.7.2. Reversal of income: 44 Alliance Business Academy
  • 45.  If any advance, including bills purchased and discounted, becomes NPA as at the close of any year, interest accrued and credited to income account in the corresponding previous year, should be reversed or provided for if the same is not realised. This will apply to Government guaranteed accounts also.  In respect of NPAs, fees, commission and similar income that have accrued should cease to accrue in the current period and should be reversed or provided for with respect to past periods, if uncollected.3.7.3 Leased Assets The net lease rentals (finance charge) on the leased asset accrued and credited to income account before the asset became non-performing, and remaining unrealised, should be reversed or provided for in the current accounting period. The term net lease rentals would mean the amount of finance charge taken to the credit of Profit & Loss Account and would be worked out as gross lease rentals adjusted by amount of statutory depreciation and lease equalisation account. As per the Guidance Note on Accounting for Leases issued by the Council of the Institute of Chartered Accountants of India (ICAI), a separate Lease Equalisation Account should be opened by the banks with a corresponding debit or credit to Lease Adjustment Account, as the case may be. Further, Lease Equalisation Account should be transferred every year to the Profit & Loss Account and disclosed separately as a deduction from/addition to gross value of lease rentals shown under the head Gross Income. 45 Alliance Business Academy
  • 46. Appropriation of recovery in NPAs  Interest realised on NPAs may be taken to income account provided the credits in the accounts towards interest are not out of fresh/ additional credit facilities sanctioned to the borrower concerned.  In the absence of a clear agreement between the bank and the borrower for the purpose of appropriation of recoveries in NPAs (i.e. towards principal or interest due), banks should adopt an accounting principle and exercise the right of appropriation of recoveries in a uniform and consistent manner.3.7.4 Interest Application:There is no objection to the banks using their own discretion in debiting interest to an NPAaccount taking the same to Interest Suspense Account or maintaining only a record of suchinterest in preformed accounts.3.7.5 Reporting of NPAs  Banks are required to furnish a Report on NPAs as on 31st March each year after completion of audit. The NPAs would relate to the banks‟ global portfolio, including the advances at the foreign branches. The Report should be furnished as per the prescribed format given in the Annexure I.  While reporting NPA figures to RBI, the amount held in interest suspense account, should be shown as a deduction from gross NPAs as well as gross advances while arriving at the net NPAs. Banks which do not maintain Interest Suspense account for parking interest due on non-performing advance accounts, may furnish the amount of interest receivable on NPAs as a foot note to the Report. 46 Alliance Business Academy
  • 47.  Whenever NPAs are reported to RBI, the amount of technical write off, if any, should be reduced from the outstanding gross advances and gross NPAs to eliminate any distortion in the quantum of NPAs being reported.3.8 Asset ClassificationCategories of NPAs (1) Standard Assets (2) Sub-Standard Assets (3) Doubtful Assets (4) Loss Assets(1) Standard Assets:Standard assets are the ones in which the bank is receiving interest as well as the principalamount of the loan regularly from the customer. Here it is also very important that in this casethe arrears of interest and the principal amount of loan do not exceed 90 days at the end offinancial year. If asset fails to be in category of standard asset that is amount due more than90 days then it is NPA and NPAs are further need to classify in sub categories.(2) Sub-standard Assets:With effect from 31 March 2005, a substandard asset would be one, which has remainedNPA for a period less than or equal to 12 month. The following features are exhibited bysubstandard assets: the current net worth of the borrowers / guarantor or the current marketvalue of the security charged is not enough to ensure recovery of the dues to the banks in full;and the asset has well-defined credit weaknesses that jeopardise the liquidation of the debtand are characterised by the distinct possibility that the banks will sustain some loss, ifdeficiencies are not corrected. 47 Alliance Business Academy
  • 48. (3) Doubtful Assets:A loan classified as doubtful has all the weaknesses inherent in assets that were classified assub-standard, with the added characteristic that the weaknesses make collection or liquidationin full, – on the basis of currently known facts, conditions and values – highly questionableand improbable.With effect from March 31, 2005, an asset would be classified as doubtful if it remained inthe sub-standard category for 12 months.(4) Loss Assets:A loss asset is one which considered uncollectible and of such little value that its continuanceas a bankable asset is not warranted- although there may be some salvage or recovery value.Also, these assets would have been identified as „loss assets‟ by the bank or internal orexternal auditors or the RBI inspection but the amount would not have been written-offwholly.3.9 IMPACT OF EXCESS LIQUIDITY:One should also not forget that the banks are faced with the problem of increasing liquidity inthe system. Further, Reserve Bank of India (RBI) is increasing the liquidity in the systemthrough various rate cuts. Banks can get rid of its excess liquidity by increasing its lendingbut, often shy away from such an option due to the high risk of default. In order to promotecertain prudential norms for healthy banking practices, most of the developed economiesrequire all banks to maintain minimum liquid and cash reserves broadly classified into CashReserve Ratio (CRR) and the Statutory Liquidity Ratio (SLR).Cash Reserve Ratio (CRR) is the reserve which the banks have to maintain with itself in theform of cash reserves or by way of current account with the Reserve Bank of India (RBI),computed as a certain percentage of its demand and time liabilities. The objective is to ensurethe safety and liquidity of the deposits with the banks. 48 Alliance Business Academy
  • 49. On the other hand, Statutory Liquidity Ratio (SLR) is the one which every banking companyshall maintain in India in the form of cash, gold or unencumbered approved securities, anamount which shall not, at the close of business on any day be less than such percentage ofthe total of its demand and time liabilities in India as on the last Friday of the secondpreceding fortnight, as the Reserve Bank of India (RBI) may specify from time to time.A rate cut (for instance, decrease in CRR) results into lesser funds to be locked up in RBIsvaults and further infuses greater funds into a system. However, almost all the banks arefacing the problem of bad loans, burgeoning non-performing assets, thinning margins, etc. asa result of which, banks are little reluctant in granting loans to corporate.As such, though in its monetary policy RBI announces rate cut but, such news are no longerwarmly greeted by the bankers.3.10 HIGH COST OF FUNDS DUE TO NPAs:Quite often genuine borrowers face the difficulties in raising funds from banks due tomounting NPA‟s. Either the bank is reluctant in providing the requisite funds to the genuineborrowers or if the funds are provided, they come at a very high cost to compensate thelender‟s losses caused due to high level of NPA‟s. Therefore, quite often corporate prefer toraise funds through commercial papers (CPs) where the interest rate on working capitalcharged by banks is higher.With the enactment of the Securitization and Reconstruction of Financial Assets andEnforcement of Security Interest Act, 2002, banks can issue notices to the defaulters to payup the dues and the borrowers will have to clear their dues within 60 days. Once the borrowerreceives a notice from the concerned bank and the financial institution, the secured assetsmentioned in the notice cannot be sold or transferred without the consent of the lenders. 49 Alliance Business Academy
  • 50. The main purpose of this notice is to inform the borrower that either the sum due to the bankor financial institution be paid by the borrower or else the former will take action by way oftaking over the possession of assets. Besides assets, banks can also takeover the managementof the company. Thus the bankers under the aforementioned Act will have the much neededauthority to either sell the assets of the defaulting companies or change their management.But the protection under the said Act only provides a partial solution. What banks shouldensure is that they should move with speed and charged with momentum in disposing off theassets. This is because as uncertainty increases with the passage of time, there is allpossibility that the recoverable value of asset also reduces and it cannot fetch good price. Iffaced with such a situation than the very purpose of getting protection under theSecuritization Act, 2002 would be defeated and the hope of seeing a must have growingbanking sector can easily vanish.3.11 Provisioning NormsGeneral:  In order to narrow down the divergences and ensure adequate provisioning by banks, it was suggested that a banks statutory auditors, if they so desire, could have a dialogue with RBIs Regional Office/ inspectors who carried out the banks inspection during the previous year with regard to the accounts contributing to the difference.  Pursuant to this, regional offices were advised to forward a list of individual advances, where the variance in the provisioning requirements between the RBI and the bank is above certain cut off levels so that the bank and the statutory auditors take into account the assessment of the RBI while making provisions for loan loss, etc. 50 Alliance Business Academy
  • 51.  The primary responsibility for making adequate provisions for any diminution in the value of loan assets, investment or other assets is that of the bank managements and the statutory auditors. The assessment made by the inspecting officer of the RBI is furnished to the bank to assist the bank management and the statutory auditors in taking a decision in regard to making adequate and necessary provisions in terms of prudential guidelines.  In conformity with the prudential norms, provisions should be made on the non- performing assets on the basis of classification of assets into prescribed categories as detailed in paragraphs 4 supra. Taking into account the time lag between an account becoming doubtful of recovery, its recognition as such, the realisation of the security and the erosion over time in the value of security charged to the bank, the banks should make provision against sub-standard assets, doubtful assets and loss assets as below:a. Loss assets:The entire asset should be written off. If the assets are permitted to remain in the books forany reason, 100 percent of the outstanding should be provided for.b. Doubtful assets:  100 percent of the extent to which the advance is not covered by the realisable value of the security to which the bank has a valid recourse and the realisable value is estimated on a realistic basis.  In regard to the secured portion, provision may be made on the following basis, at the rates ranging from 20 percent to 50 percent of the secured portion depending upon the period for which the asset has remained doubtful: 51 Alliance Business Academy
  • 52. Period for which the advance has been Provision considered as doubtful requirement (%) Up to one year 20 One to three years 30 More than three years: 60% with effect from March 31,2005. (1) Outstanding stock of NPAs as on March 31, 2004. 75% effect from March 31, (2) Advances classified as „doubtful‟ 2006. more than three years on or after 100% with effect from March April 1, 2004. 31, 2007.  Additional provisioning consequent upon the change in the definition of doubtful assets effective from March 31, 2003 has to be made in phases as under: As on31.03.2003, 50 percent of the additional provisioning requirement on the assets which became doubtful on account of new norm of 18 months for transition from sub- standard asset to doubtful category.  As on 31.03.2002, balance of the provisions not made during the previous year, in addition to the provisions needed, as on 31.03.2002.  Banks are permitted to phase the additional provisioning consequent upon the reduction in the transition period from substandard to doubtful asset from 18 to 12 months over a four year period commencing from the year ending March 31, 2005, with a minimum of 20 % each year.Note: Valuation of Security for provisioning purposes 52 Alliance Business Academy
  • 53. With a view to bringing down divergence arising out of difference in assessment of the valueof security, in cases of NPAs with balance of Rs. 5crore and above stock audit at annualintervals by external agencies appointed as per the guidelines approved by the Board wouldbe mandatory in order to enhance the reliability on stock valuation. Values appointed as perthe guidelines approved by the Board of Directors should get collaterals such as immovableproperties charged in favour of the bank valued once in three years.c. Sub-standard assets:A general provision of 10 percent on total outstanding should be made without making anyallowance for DICGC/ECGC guarantee cover and securities available.d. Standard assets:  From the year ending 31.03.2000, the banks should make a general provision of a minimum of 0.40 percent on standard assets on global loan portfolio basis.  Net NPAs.  The provisions towards Standard Assets need not be netted from gross advances but shown separately as Contingent Provisions against Standard Assets under Other Liabilities and Provisions - Others in Schedule 5 of the balance sheet.3.11.1 Floating provisions:Some of the banks make a floating provision over and above the specific provisions made inrespect of accounts identified as NPAs. The floating provisions, wherever available, could beSet-off against provisions required to be made as per above stated provisioning guidelines.Considering that higher loan loss provisioning Adds to the overall financial strength of the 53 Alliance Business Academy
  • 54. banks and the stability of the financial sector, banks are urged to voluntarily set apart provisions much above the minimum prudential levels as a desirable practice. 311.2 Provisions on Leased Assets: Leases are peculiar transactions where the assets are not recorded in the books of the user of such assets as Assets, whereas they are recorded in the books of the owner even though the physical existence of the asset is with the user (lessee). __(AS19 ICAI)  Doubtful assets :- 100 percent of the extent to which the finance is not secured by the realisable value of the leased asset. Realisable value to be estimated on a realistic basis. In addition to the above provision, the following provision on the net book value of the secured portion should be made, depending upon the period for which asset has been doubtful: Period %age of provision Up to one year 20 One to three years 30 More than three years 50 Loss assets :- The entire asset should be written-off. If for any reason, an asset is allowed to remain in books, 100 percent of the sum of the net investment in the lease and the unrealised portion of finance income net of finance charge component should be provided for. („Net book value) 3.11.3 Guidelines for Provisions under Special Circumstances Government guaranteed advances: 54 Alliance Business Academy
  • 55.  With effect from 31 March 2000, in respect of advances sanctioned against StateGovernment guarantee, if the guarantee is invoked and remains in default for more than twoquarters (180 days at present), the banks should make normal provisions as prescribed inparagraph 4.1.2 above. As regards advances guaranteed by State Governments, in respect of which guaranteestood invoked as on 31.03.2000, necessary provision was allowed to be made, in a phasedmanner, during the financial years ending 31.03.2000 to 31.03.2003 with a minimum of 25%each year.Advances granted under rehabilitation packages approved by BIFR/term lendinginstitutions: In respect of advances under rehabilitation package approved by BIFR/term lendinginstitutions, the provision should continue to be made in respect of dues to the bank on theexisting credit facilities as per their classification as sub-standard or doubtful asset. As regards the additional facilities sanctioned as per package finalized by BIFR and/orterm lending institutions, provision on additional facilities sanctioned need not be made for aperiod of one year from the date of disbursement. In respect of additional credit facilities granted to SSI units which are identified as sick[as defined in RPCD circular No.PLNFS.BC.57 /06.04.01/2001-2002 dated 16 January 2002]and where rehabilitation packages/nursing programmers have been drawn by the banksthemselves or under consortium arrangements, no provision need be made for a period of oneyear.Advances against term deposits, NSCs eligible for surrender, IVPs, KVPs, and life policiesare exempted from provisioning requirements.However, advances against gold ornaments, government securities and all other kinds ofsecurities are not exempted from provisioning requirements.Treatment of interest suspense account: 55 Alliance Business Academy
  • 56. Amounts held in Interest Suspense Account should not be reckoned as part of provisions.Amounts lying in the Interest Suspense Account should be deducted from the relativeadvances and thereafter, provisioning as per the norms, should be made on the balances aftersuch deduction.Advances covered by ECGC/DICGC guarantee:In the case of advances guaranteed by DICGC/ECGC, provision should be made only for thebalance in excess of the amount guaranteed by these Corporations. Further, while arriving atthe provision required to be made for doubtful assets, realisable value of the securities shouldfirst be deducted from the outstanding balance in respect of the amount guaranteed by theseCorporations and then provision made as illustrated hereunder:Example Outstanding Balance Rs. 4lakhs DICGC Cover 50 percent Period for which the advance has remained More than 3 years remained doubtful doubtful Value of security held Rs. 1.50lakhs (excludes worth of Rs.)Provision required to be made Outstanding balance Rs. 4.00lakhs Less: Value of security held Rs. 1.50lakhs Unrealised balance Rs. 2.50lakhs Less: DICGC Cover Rs. 1.25lakhs (50% of unrealisable balance) 56 Alliance Business Academy
  • 57. Net unsecured balance Rs. 1.25lakhs Provision for unsecured portion of advance Rs. 1.25lakhs (@ 100 percent of unsecured portion) Provision for secured portion of advance Rs. 0.75lakhs (@ 50 percent of secured portion) Total provision required to be made Rs. 2.00lakhs Advance covered by CGTSI guarantee In case the advance covered by CGTSI guarantee becomes non-performing, no provision need be made towards the guaranteed portion. The amount outstanding in excess of the guaranteed portion should be provided for as per the extant guidelines on provisioning for non-performing advances. Two illustrative examples are given below: Example IAsset classification status: Doubtful – More than 3 years;CGTSI Cover 75% of the amount outstanding or 75% of the unsecured amount or Rs.18.75lakh, whichever is the leastRealisable value of Security Rs.1.50lakhBalance outstanding Rs.10.00lakhLess Realisable value of Rs. 1.50lakhsecurityUnsecured amount Rs. 8.50lakh 57 Alliance Business Academy
  • 58. Less CGTSI cover (75%) Rs. 6.38lakhNet unsecured and uncovered Rs. 2.12lakhportion: Provision RequiredSecured portion Rs.1.50lakh Rs. 0.75lakh (@ 50%)Unsecured & uncovered portion Rs.2.12lakh Rs. 2.12lakh ( @100%)Total provision required Rs. 2.87lakh Example IIAsset classification status Doubtful – More than 3 years;CGTSI Cover 75% of the amount outstanding or75% of the unsecured amount or Rs.18.75lakh, whichever is the leastRealisable value of Security Rs.10.00lakhBalance outstanding Rs.40.00lakhLess Realisable value of Rs. 10.00lakhsecurityUnsecured amount Rs. 30.00lakhLess CGTSI cover (75%) Rs. 18.75lakhNet unsecured and uncovered Rs. 11.25lakhportion: 58 Alliance Business Academy
  • 59. Provision RequiredSecured portion Rs.10.00lakh Rs. 5.00lakh (@ 50%)Unsecured & uncovered portion Rs.11.25lakh Rs.11.25lakh (100%)Total provision required Rs. 16.25lakh Take-out finance The lending institution should make provisions against a take-out finance turning into NPA pending its take-over by the taking-over institution. As and when the asset is taken-over by the taking-over institution, the corresponding provisions could be reversed. Reserve for Exchange Rate Fluctuations Account (RERFA) When exchange rate movements of Indian rupee turn adverse, the outstanding amount of foreign currency denominated a loan (where actual disbursement was made in Indian Rupee) which becomes overdue goes up correspondingly, with its attendant implications of provisioning requirements. Such assets should not normally be revalue. In case such assets need to be revaluing as per requirement of accounting practices or for any other requirement, the following procedure may be adopted:  The loss on revaluation of assets has to be booked in the banks Profit & Loss Account. Besides the provisioning requirement as per Asset Classification, banks should treat the full amount of the Revaluation Gain relating to the corresponding assets, if any, on account of Foreign Exchange Fluctuation as provision against the particular assets. 59 Alliance Business Academy
  • 60. 3.12 Impact of NPA: Profitability:-NPA means booking of money in terms of bad asset, which occurred due to wrong choice ofclient. Because of the money getting blocked the prodigality of bank decreases not only bythe amount of NPA but NPA lead to opportunity cost also as that much of profit invested insome return earning project/asset. So NPA doesn‟t affect current profit but also future streamof profit, which may lead to loss of some long-term beneficial opportunity. Another impact ofreduction in profitability is low ROI (return on investment), which adversely affect currentearning of bank. Liquidity:-Money is getting blocked, decreased profit lead to lack of enough cash at hand which lead toborrowing money for shotrtes period of time which lead to additional cost to the company.Difficulty in operating the functions of bank is another cause of NPA due to lack of money.Routine payments and dues. Involvement of management:-Time and efforts of management is another indirect cost which bank has to bear due to NPA.Time and efforts of management in handling and managing NPA would have diverted tosome fruitful activities, which would have given good returns. Now day‟s banks have specialemployees to deal and handle NPAs, which is additional cost to the bank. Credit loss:-Bank is facing problem of NPA then it adversely affect the value of bank in terms of marketcredit. It will lose its goodwill and brand image and credit which have negative impact to thepeople who are putting their money in the banks. 60 Alliance Business Academy
  • 61. 3.13 Early symptoms by which one can recognize a performing assetturning in to Non-performing asset:-Four categories of early symptoms:----------------------------------------------------(1) Financial:  Non-payment of the very first instalment in case of term loan.  Bouncing of cheque due to insufficient balance in the accounts.  Irregularity in instalment.  Irregularity of operations in the accounts.  Unpaid overdue bills.  Declining Current Ratio.  Payment which does not cover the interest and principal amount of that instalment.  While monitoring the accounts it is found that partial amount is diverted to sister concern or parent company.(2) Operational and Physical:  If information is received that the borrower has either initiated the process of winding up or are not doing the business.  Overdue receivables.  Stock statement not submitted on time.  External non-controllable factor like natural calamities in the city where borrower conduct his business.  Frequent changes in plan.  Non-payment of wages.(3) Attitudinal Changes:  Avoidance of contact with bank. 61 Alliance Business Academy
  • 62.  Problem between partners.(4) Others:  Changes in Government policies.  Death of borrower.  Competition in the market.3.14 Preventive Measurement for NPA Early Recognition of the Problem:-Invariably, by the time banks start their efforts to get involved in a revival process, it‟s toolate to retrieve the situation- both in terms of rehabilitation of the project and recovery ofbank‟s dues. Identification of weakness in the very beginning that is: When the account startsshowing first signs of weakness regardless of the fact that it may not have become NPA, isimperative. Assessment of the potential of revival may be done on the basis of a techno-economic viability study.Restructuring should be attempted where, after an objective assessment of the promoter‟sintention, banks are convinced of a turnaround within a scheduled timeframe. In respect oftotally unviable units as decided by the bank, it is better to facilitate winding up/ selling of theunit earlier, so as to recover whatever is possible through legal means before the securityposition becomes worse. Identifying Borrowers with Genuine Intent:-Identifying borrowers with genuine intent from those who are non- serious with nocommitment or stake in revival is a challenge confronting bankers. Here the role of frontlineofficials at the branch level is paramount as they are the ones who has intelligent inputs withregard to promoters‟ sincerity, and capability to achieve turnaround. Based on this objective 62 Alliance Business Academy
  • 63. assessment, banks should decide as quickly as possible whether it would be worthwhile tocommit additional finance.In this regard banks may consider having “Special Investigation” of all financial transactionor business transaction, books of account in order to ascertain real factors that contributed tosickness of the borrower. Banks may have penal of technical experts with proven expertiseand track record of preparing techno-economic study of the project of the borrowers.Borrowers having genuine problems due to temporary mismatch in fund flow or suddenrequirement of additional fund may be entertained at branch level, and for this purpose aspecial limit to such type of cases should be decided. This will obviate the need to route theadditional funding through the controlling offices in deserving cases, and help avert manyaccounts slipping into NPA category. Timeliness and Adequacy of response:-Longer the delay in response, grater the injury to the account and the asset. Time is a crucialelement in any restructuring or rehabilitation activity. The response decided on the basis oftechno-economic study and promoter‟s commitment, has to be adequate in terms of extend ofadditional funding and relaxations etc. under the restructuring exercise. The package ofassistance may be flexible and bank may look at the exit option. Focus on Cash Flows:-While financing, at the time of restructuring the banks may not be guided by the conventionalfund flow analysis only, which could yield a potentially misleading picture. Appraisal forfresh credit requirements may be done by analysing funds flow in conjunction with the CashFlow rather than only on the basis of Funds Flow. 63 Alliance Business Academy
  • 64.  Management Effectiveness:-The general perception among borrower is that it is lack of finance that leads to sickness andNPAs. But this may not be the case all the time. Management effectiveness in tacklingadverse business conditions is a very important aspect that affects a borrowing unit‟sfortunes. A bank may commit additional finance to an aling unit only after basic viability ofthe enterprise also in the context of quality of management is examined and confirmed.Where the default is due to deeper malady, viability study or investigative audit should bedone – it will be useful to have consultant appointed as early as possible to examine thisaspect. A proper techno economic viability study must thus become the basis on which anyfuture action can be considered. Multiple Financing:-A. During the exercise for assessment of viability and restructuring, a Pragmatic andunified approach by all the lending banks/ FIs as also sharing of all relevant information onthe borrower would go a long way toward overall success of rehabilitation exercise, given theprobability of success/failure.B. In some default cases, where the unit is still working, the bank should make sure that itcaptures the cash flows (there is a tendency on part of the borrowers to switch bankers oncethey default, for fear of getting their cash flows forfeited), and ensure that such cash flows areused for working capital purposes. Toward this end, there should be regular flow ofinformation among consortium members. A bank, which is not part of the consortium, maynot be allowed to offer credit facilities to such defaulting clients. Current account facilitiesmay also be denied at no consortium banks to such clients and violation may attract penalaction. The Credit Information Bureau of India Ltd. (CIBIL) may be very useful formeaningful information exchange on defaulting borrowers once the setup becomes fullyoperational. 64 Alliance Business Academy
  • 65. C. In a forum of lenders, the priority of each lender will be different. While one set of lendersmay be willing to wait for a longer time to recover its dues, another lender may have a muchshorter timeframe in mind. So it is possible that the letter categories of lenders may be willingto exit, even a t a cost – by a discounted settlement of the exposure. Therefore, any plan forrestructuring/rehabilitation may take this aspect into account.D. Corporate Debt Restructuring mechanism has been institutionalized in 2001 to providea timely and transparent system for restructuring of the corporate debt of Rs. 20crore andabove with the banks and FIs on a voluntary basis and outside the legal framework. Underthis system, banks may greatly benefit in terms of restructuring of large standard accountsand viable sub-standard accounts with consortium/multiple banking arrangements.3.15 Tools for recovery of NPAs 65 Alliance Business Academy
  • 66. Once NPA occurred, one must come out of it or it should be managed in most efficientmanner. Legal ways and means are there to overcome and manage NPAs. We will look intoeach one of it.3.15.1Willful Default:- 66 Alliance Business Academy
  • 67. A] Lok AdalatB] Debt Recovery TribunalC] Securitization ActD] Asset ReconstructionA. Lok Adalat:Lok Adalat institutions help banks to settle disputes involving account in “doubtful” and“loss” category, with outstanding balance of Rs.5lakh for compromise settlement under LokAdalat. Debt recovery tribunals have been empowered to organize Lok Adalat to decide oncases of NPAs of Rs. 10lakh and above. This mechanism has proved to be quite effective forspeedy justice and recovery of small loans. The progress through this channel is expected topick up in the coming years.B. Debt Recovery Tribunals (DRT):The recovery of debts due to banks and financial institution passed in March 2000 has helpedin strengthening the function of DRTs. Provision for placement of more than one recoveryofficer, power to attach defendant‟s property/assets before judgment, penal provision fordisobedience of tribunal‟s order or for breach of any terms of order and appointment ofreceiver with power of realization, management, protection and preservation of property areexpected to provide necessary teeth to the DRTs and speed up the recovery of NPAs in thetimes to come. DRTs which have been set up by the Government to facilitate speedy recoveryby banks/DFIs, have not been able make much impact on loan recovery due to variety ofreasons like inadequate number, lack of infrastructure, under staffing and frequentadjournment of cases. It is essential that DRT mechanism is strengthened and vested with aproper enforcement mechanism to enforce their orders. On observation of any order passedby the tribunal should amount to contempt of court, the DRT should have right to initiatecontempt proceedings. The DRT should empowered to sell asset of the debtor companies andforward the proceed to the winding – up court for distribution among the lenders. 67 Alliance Business Academy
  • 68. C. SECURITIZATION ACT, 2002:The need for the setting up an asset reconstruction company for acquiring distressed assetsfrom Banks and FIs with a view to develop market for such assets was being felt, since long.Narasimham Committee 1 &2 and the Verma Committee on restructuring of weak Banks hasstrongly recommended the setting up of Asset Reconstruction Companies (ARCs).The business of Securitization and Reconstruction is primarily meant for more than onepurpose:  To regulate the business of securitization and reconstruction of the financial interest  To regulate enforcement of the security interest and for the matters connected therewith or the matters incidental theretoThe debt securitization is a new concept in the Indian financial markets and is primarilymeant for enhancing the liquidity of the Banks and FIs which have extended financialassistance to the borrowers for various purposes.The debt securitization makes available with these institutions the security papers against thefinancial assets which have been created out of the financial assistance sanctioned anddisbursed by these institutions and in the case of a default by the borrowers the securedcreditors can have a recourse to either the securitization of the financial asset or thereconstruction of the same.3.15.2Inability to PayConsortium arrangements:Asset classification of accounts under consortium should be based on the record of recoveryof the individual member banks and other aspects having a bearing on their cover ability ofthe advances. Where the remittances by the borrower under consortium lending arrangementsare pooled with one bank and/or where the bank receiving remittances is not parting with theshare of other member banks, the account will be treated as not serviced in the books of the 68 Alliance Business Academy
  • 69. other member banks and therefore, be treated as NPA. The banks participating in theconsortium should, therefore, arrange to get their share of recovery transferred from the leadbank or get an express consent from the lead bank for the transfer of their share of recovery,to ensure proper asset classification in their respective books.Corporate debt Restructuring (CDR):BackgroundIn spite of their best efforts and intentions, sometimes corporate find themselves in financialdifficulty because of factors beyond their control and also due to certain internal reasons. Forthe revival of the corporate as well as for the safety of the money lent by the banks and FIs,timely support through restructuring in genuine cases is called for. However, delay inagreement amongst different lending institutions often comes in the way of such endeavours. Based on the experience in other countries like the U.K., Thailand, Korea, etc. ofputting in place institutional mechanism for restructuring of corporate debt and need for asimilar mechanism in India, a Corporate Debt Restructuring System has been evolved, asunder :ObjectiveThe objective of the Corporate Debt Restructuring (CDR) framework is to ensure timely andtransparent mechanism for restructuring of the corporate debts of viable entities facingproblems, outside the purview of BIFR, DRT and other legal proceedings, for thebenefit of all concerned. In particular, the framework will aim at preserving viable corporatethat are affected by certain internal and external factors and minimize the losses to thecreditors and other stakeholders through an orderly and coordinated restructuringprogrammer.Structure: 69 Alliance Business Academy
  • 70. CDR system in the country will have a three-tier structure: (A) CDR Standing Forum (B) CDR Empowered Group (C) CDR Cell(A) CDR Standing Forum : The CDR Standing Forum would be the representative general body of all financialinstitutions and banks participating in CDR system. All financial institutions and banksshould participate in the system in their own interest. CDR Standing Forum will be a self-empowered body, which will lay down policies and guidelines, guide and monitor theprogress of corporate debt restructuring. The Forum will also provide an official platform for both the creditors and borrowers(by consultation) to amicably and collectively evolve policies and guidelines for working outdebt restructuring plans in the interests of all concerned. The CDR Standing Forum shall comprise Chairman & Managing Director, IndustrialDevelopment Bank of India; Managing Director, Industrial Credit & Investment Corporationof India Limited; Chairman, State Bank of India; Chairman, Indian Banks Association andExecutive Director, Reserve Bank of India as well as Chairmen and Managing Directors ofall banks and financial institutions participating as permanent members in the system. TheForum will elect its Chairman for a period of one year and the principle of rotation will befollowed in the subsequent years. However, the Forum may decide to have a WorkingChairman as a whole-time officer to guide and carry out the decisions of the CDR StandingForum. A CDR Core Group will be carved out of the CDR Standing Forum to assist theStanding Forum in convening the meetings and taking decisions relating to policy, on behalfof the Standing Forum. The Core Group will consist of Chief Executives of IDBI, ICICI, 70 Alliance Business Academy
  • 71. SBI, Bank of Baroda, Bank of India, Punjab National Bank, Indian Banks Association and arepresentative of Reserve Bank of India. The CDR Standing Forum shall meet at least once every six months and would reviewand monitor the progress of corporate debt restructuring system. The Forum would also laydown the policies and guidelines to be followed by the CDR Empowered Group and CDRCell for debt restructuring and would ensure their smooth functioning and adherence to theprescribed time schedules for debt restructuring. It can also review any individual decisionsof the CDR Empowered Group and CDR Cell. The CDR Standing Forum, the CDR Empowered Group and CDR Cell (described infollowing paragraphs) shall be housed in IDBI. All financial institutions and banks shall sharethe administrative and other costs. The sharing pattern shall be as determined by the StandingForum.CDR Empowered Group and CDR Cell: The individual cases of corporate debt restructuring shall be decided by the CDREmpowered Group, consisting of ED level representatives of IDBI, ICICI Limited and SBI asstanding members, in addition to ED level representatives of financial institutions and bankswho have an exposure to the concerned company. In order to make the CDR EmpoweredGroup effective and broad based and operate efficiently and smoothly, it would have to beensured that each financial institution and bank, as participants of the CDR system,nominates a panel of two or three EDs, one of whom will participate in a specific meeting ofthe Empowered Group dealing with individual restructuring cases. Where, however, a bank /financial institution has only one Executive Director, the panel may consist of seniorofficials, duly authorized by its Board. The level of representation of banks/ financialinstitutions on the CDR Empowered Group should be at a sufficiently senior level to ensurethat concerned bank / FI abides by the necessary commitments including sacrifices, madetowards debt restructuring. 71 Alliance Business Academy
  • 72. The Empowered Group will consider the preliminary report of all cases of requests ofrestructuring, submitted to it by the CDR Cell. After the Empowered Group decides thatrestructuring of the company is prima-facie feasible and the enterprise is potentially viable interms of the policies and guidelines evolved by Standing Forum, the detailed restructuringpackage will be worked out by the CDR Cell in conjunction with the Lead Institution. The CDR Empowered Group would be mandated to look into each case of debtrestructuring, examine the viability and rehabilitation potential of the Company andapprove the restructuring package within a specified time frame of 90 days, or at best 180days of reference to the Empowered Group. There should be a general authorisation by the respective Boards of the participatinginstitutions / banks in favour of their representatives on the CDR Empowered Group,authorising them to take decisions on behalf of their organization, regarding restructuring ofdebts of individual corporate. The decisions of the CDR Empowered Group shall be final and action-referencepoint. If restructuring of debt is found viable and feasible and accepted by the EmpoweredGroup, the company would be put on the restructuring mode. If, however, restructuring is notfound viable, the creditors would then be free to take necessary steps for immediate recoveryof dues and / or liquidation or winding up of the company, collectively or individually.CDR Cell: The CDR Standing Forum and the CDR Empowered Group will be assisted by a CDRCell in all their functions. The CDR Cell will make the initial scrutiny of the proposalsreceived from borrowers / lenders, by calling for proposed rehabilitation plan and otherinformation and put up the matter before the CDR Empowered Group, within one month todecide whether rehabilitation is prima facie feasible, if so, the CDR Cell will proceed toprepare detailed Rehabilitation Plan with the help of lenders and if necessary, experts to beengaged from outside. If not found prima facie feasible, the lenders may start action forrecovery of their dues. 72 Alliance Business Academy
  • 73. To begin with, CDR Cell will be constituted in IDBI, Mumbai and adequate membersof staff for the Cell will be deputed from banks and financial institutions. The CDR Cell mayalso take outside professional help. The initial cost in operating the CDR mechanismincluding CDR Cell will be met by IDBI initially for one year and then from contributionfrom the financial institutions and banks in the Core Group at the rate of Rs.50lakh each andcontribution from other institutions and banks at the rate of Rs.5lakh each. All references for corporate debt restructuring by lenders or borrowers will be madeto the CDR Cell. It shall be the responsibility of the lead institution / major stakeholder to thecorporate, to work out a preliminary restructuring plan in consultation with other stakeholdersand submit to the CDR Cell within one month. The CDR Cell will prepare the restructuringplan in terms of the general policies and guidelines approved by the CDR Standing Forumand place for the consideration of the Empowered Group within 30 days for decision. TheEmpowered Group can approve or suggest modifications, so, however, that a final decisionmust be taken within a total period of 90 days. However, for sufficient reasons the period canbe extended maximum up to 180 days from the date of reference to the CDR Cell.Other features: CDR will be a Non-statutory mechanism. CDR mechanism will be a voluntary system based on debtor-creditor agreement and inter-creditor agreement. The scheme will not apply to accounts involving only one financial institution or one bank. The CDR mechanism will cover only multiple banking accounts / syndication / consortium accounts with outstanding exposure of Rs.20crore and above by banks and institutions. 73 Alliance Business Academy
  • 74. The CDR system will be applicable only to standard and sub-standard accounts.However, as an interim measure, permission for corporate debt restructuring will be madeavailable by RBI on the basis of specific recommendation of CDR "Core-Group", if aminimum of 75 per cent (by value) of the lenders constituting banks and FIs consent forCDR, irrespective of differences in asset classification status in banks/ financial institutions.There would be no requirement of the account / company being sick, NPA or being indefault for a specified period before reference to the CDR Group. However, potentiallyviable cases of NPAs will get priority. This approach would provide the necessaryflexibility and facilitate timely intervention for debt restructuring. Prescribing anymilestone(s) may not be necessary, since the debt restructuring exercise is being triggered bybanks and financial institutions or with their consent. In no case, the requests of any corporateindulging in wilful default or misfeasance will be considered for restructuring under CDR. Reference to Corporate Debt Restructuring System could be triggered by (i)any ormore of the secured creditor who have minimum 20% share in either working capital or termfinance, or (ii) by the concerned corporate, if supported by a bank or financial institutionhaving stake as in (i) above.Legal Basis The legal basis to the CDR mechanism shall be provided by the Debtor-CreditorAgreement (DCA) and the Inter-Creditor Agreement. The debtors shall have to accede tothe DCA, either at the time of original loan documentation (for future cases) or at the time ofreference to Corporate Debt Restructuring Cell. Similarly, all participants in the CDRmechanism through their membership of the Standing Forum shall have to enter into a legallybinding agreement, with necessary enforcement and penal clauses, to operate the Systemthrough laid-down policies and guidelines.Stand-Still Clause: 74 Alliance Business Academy
  • 75. One of the most important elements of Debtor-Creditor Agreement would be stand stillagreement binding for 90 days, or 180 days by both sides. Under this clause, both thedebtor and creditor(s) shall agree to a legally binding stand-still whereby both theparties commit themselves not to taking recourse to any other legal action during thestand-still period, this would be necessary for enabling the CDR System to undertake thenecessary debt restructuring exercise without any outside intervention judicial or otherwise.The Inter-Creditors Agreement would be a legally binding agreement amongst the securedcreditors, with necessary enforcement and penal clauses, wherein the creditors would committhemselves to abide by the various elements of CDR system. Further , the creditors shallagree that if 75% of secured creditors by value, agree to a debt restructuring package, thesame would be binding on the remaining secured creditors.Accounting treatment for restructured accountsThe accounting treatment of accounts restructured under CDR would be governed by theprudential norms indicated in circular DBOD. BP. BC. 98 / 21.04.048 / 2000-01 dated March30, 2001. Restructuring of corporate debts under CDR could take place in the followingstages:  Before commencement of commercial production;  After commencement of commercial production but before the asset has been classified as sub-standard;  After commencement of commercial production and the asset has been classified as sub-standard.The prudential treatment of the accounts, subjected to restructuring under CDR, would begoverned by the following norms:Treatment of standard accounts restructured under CDR: 75 Alliance Business Academy
  • 76.  A rescheduling of the instalments of principal alone, at any of the aforesaid first two stages [paragraph 5(a) and (b) above] would not cause a standard asset to be classified in the sub-standard category, provided the loan / credit facility is fully secured.  A rescheduling of interest element at any of the foregoing first two stages would not cause an asset to be downgraded to sub-standard category subject to the condition that the amount of sacrifice, if any, in the element of interest, measured in present value terms, is either written off or provision is made to the extent of the sacrifice involved. For the purpose, the future interest due as per the original loan agreement in respect of an account should be discounted to the present value at a rate appropriate to the risk category of the borrower (i.e. current PLR + the appropriate credit risk premium for the borrower-category) and compared with the present value of the dues expected to be received under the restructuring package, discounted on the same basis.  In case there is a sacrifice involved in the amount of interest in present value terms, as at (b) above, the amount of sacrifice should either be written off or provision made to the extent of the sacrifice involved.Treatment of sub-standard accounts restructured under CDR A rescheduling of the instalments of principal alone, would render a sub-standardasset eligible to be continued in the sub-standard category for the specified period, providedthe loan / credit facility is fully secured. A rescheduling of interest element would render a sub-standard asset eligible to becontinued to be classified in sub-standard category for the specified period subject to thecondition that the amount of sacrifice, if any, in the element of interest, measured in presentvalue terms, is either written off or provision is made to the extent of the sacrifice involved.For the purpose, the future interest due as per the original loan agreement in respect of anaccount should be discounted to the present value at a rate appropriate to the risk category ofthe borrower (i.e., current PLR + the appropriate credit risk premium for the borrower- 76 Alliance Business Academy
  • 77. category) and compared with the present value of the dues expected to be received under therestructuring package, discounted on the same basis. In case there is a sacrifice involved in the amount of interest in present value terms, asat (b) above, the amount of sacrifice should either be written off or provision made to theextent of the sacrifice involved. Even in cases where the sacrifice is by way of write off of thepast interest dues, the asset should continue to be treated as sub-standard. The sub-standard accounts at (ii) (a), (b) and (c) above, which have been subjected torestructuring, etc. whether in respect of principal instalment or interest amount, by whatevermodality, would be eligible to be upgraded to the standard category only after the specifiedperiod, i.e., a period of one year after the date when first payment of interest or of principal,whichever is earlier, falls due, subject to satisfactory performance during the period. Theamount of provision made earlier, net of the amount provided for the sacrifice in the interestamount in present value terms as aforesaid, could also be reversed after the one-year period. During this one-year period, the sub-standard asset will not deteriorate in itsclassification if satisfactory performance of the account is demonstrated during the period. Incase, however, the satisfactory performance during the one year period is not evidenced, theasset classification of the restructured account would be governed as per the applicableprudential norms with reference to the pre-restructuring payment schedule. The asset classification under CDR would continue to be bank-specific based onrecord of recovery of each bank, as per the existing prudential norms applicable to banks.3.16 Restructuring / Rescheduling of Loans 77 Alliance Business Academy
  • 78. A standard asset where the terms of the loan agreement regarding Interest and principal havebeen renegotiated or rescheduled after commencement of production should be classified assub-standard and should remain in such category for at least one year of satisfactoryperformance under the renegotiated or rescheduled terms. In the case of sub-standard anddoubtful assets also, rescheduling does not entitle a bank to upgrade the quality of advanceautomatically unless there is satisfactory performance under the rescheduled / renegotiatedterms. Following representations from banks that the foregoing stipulations deter the banksfrom restructuring of standard and sub-standard loan assets even though the modificationof terms might not jeopardize the assurance of repayment of dues from the borrower, thenorms relating to restructuring of standard and sub-standard assets were reviewed inMarch2001. In the context of restructuring of the accounts, the following stages at which therestructuring / rescheduling / renegotiation of the terms of loan agreement could take place,can be identified:1) Before commencement of commercial production;2) After commencement of commercial production but before the asset has been classified as substandard,3) After commencement of commercial production and after the asset has been classified as substandard.In each of the foregoing three stages, the rescheduling, etc., of principal and/or of interestcould take place, with or without sacrifice, as part of the restructuring package evolved.3.16.1 Treatment of Restructured Standard Accounts:A rescheduling of the installments of principal alone, at any of the aforesaid first two stageswould not cause a standard asset to be classified in the substandard category provided theloan/credit facility is fully secured.A rescheduling of interest element at any of the foregoing first two stages would not causean asset to be downgraded to substandard category subject to the condition that the amount ofsacrifice, if any, in the element of interest, measured in present value terms, is eitherwritten off or provision is made to the extent of the sacrifice involved. For the purpose, thefuture interest due as per the original loan agreement in respect of an account should be 78 Alliance Business Academy
  • 79. discounted to the present value at a rate appropriate to the risk category of the borrower (i.e.,current PLR+ the appropriate credit risk premium for the borrower-category) and comparedwith the present value of the dues expected to be received under their structuring package,discounted on the same basis.In case there is a sacrifice involved in the amount of interest in present value terms, as at (b)above, the amount of sacrifice should either be written off or provision made to the extentof the sacrifice involved.3.16.2 Treatment of restructured sub-standard accounts:A rescheduling of the installments of principal alone would render a sub-standard asseteligible to be continued in the sub-standard category for the specified period, provided theloan/credit facility is fully secured.A rescheduling of interest element would render a sub-standard asset eligible to be continuedto be classified in substandard category for the specified period subject to the condition thatthe amount of sacrifice, if any, in the element of interest, measured in present value terms,is either written off or provision is made to the extent of the sacrifice involved. For thepurpose, the future interest due as per the original loan agreement in respect of an accountshould be discounted to the present value at a rate appropriate to the risk category of theborrower (i.e., current PLR + the appropriate credit risk premium for the borrower category)and compared with the present value of the dues expected to be received under therestructuring package, discounted on the same basis.In case there is a sacrifice involved in the amount of interest in present value terms, as at (b)above, the amount of sacrifice should either be written off or provision made to the extent ofthe sacrifice involved. Even in cases where the sacrifice is by way of write off of the pastinterest dues, the asset should continue to be treated as sub-standard.3.16.3Up gradation of restructured accounts: 79 Alliance Business Academy
  • 80. The sub-standard accounts which have been subjected to restructuring etc., whether in respectof principal installment or interest amount, by whatever modality, would be eligible to beupgraded to the standard category only after the specified period i.e., a period of one yearafter the date when first payment of interest or of principal, whichever is earlier, falls due,subject to satisfactory performance during the period. The amount of provision made earlier,net of the amount provided for the sacrifice in the interest amount in present value terms asaforesaid, could also be reversed after the one year period. During this one-year period, thesubstandard asset will not deteriorate in its classification if satisfactory performance of theaccount is demonstrated during the period. In case, however, the satisfactory performanceduring the one-year period is not evidenced, the asset classification of the restructuredaccount would be governed as per the applicable prudential norms with reference to the pre-restructured payment schedule.3.16.4 Income recognitionThere will be no change in the existing instructions on income recognition. Consequently,banks should not recognize income on accrual basis in respect of the projects even though theasset is classified as a standard asset if the asset is a "non performing asset" in terms of theextant instructions. In other words, while the accounts of the project may be classified as astandard asset, banks shall recognize income in such accounts only on realization on cashbasis if the asset has otherwise become „non performing‟ as per the extant delinquency normof 180days.The delinquency norm would become 90 days with effect from 31 March2004.Consequently, banks, which have wrongly recognized income in the past, should reverse theinterest if it was recognized as income during the current year or make a provision for anequivalent amount if it was recognized as income in the previous year(s). As regards theregulatory treatment of income recognized as „funded interest‟ and „conversion into equity,debentures or any other instrument‟ banks should adopt the following:3.16.5 Funded Interest: 80 Alliance Business Academy
  • 81. Income recognition in respect of the NPAs, regardless of whether these are or are notsubjected to restructuring/rescheduling/ renegotiation of terms of the loan agreement, shouldbe done strictly on cash basis, only on realization and not if the amount of interest overduehas been funded. If, however, the amount of funded interest is recognized as income, aprovision for an equal amount should also be made simultaneously. In other words, anyfunding of interest in respect of NPAs, if recognized as income, should be fully provided for. Conversion into equity, debentures or any other instrument: The amount outstanding converted into other instruments would normally comprise principal and the interest components. If the amount of interest dues is converted into equity or any other instrument, and income is recognized in consequence, full provision should be made for the amount of income so recognized to offset the effect of such income recognition. Such provision would be in addition to the amount of provision that may be necessary for the depreciation in the value of the equity or other instruments, as per the investment valuation norms. However, if the conversion of interest is into equity, which is quoted, interest income can be recognized at market value of equity, as on the date of conversion, not exceeding the amount of interest converted to equity. Such equity must thereafter be classified in the "available for sale" category and valued at lower of cost or market value. In case of conversion of principal and /or interest in respect of NPAs into debentures, such debentures should be treated as NPA, in the same asset classification as was applicable to loan just before conversion and provision made as per-norms. This norm would also apply to zero coupon bonds or otherInstruments which seek to defer the liability of the issuer. On such debentures, income shouldbe recognized only on realization basis. The income in respect of unrealized interest, which isconverted into debentures or any other fixed maturity instrument, should be recognized onlyon redemption of such instrument. Subject to the above, the equity shares or otherinstruments arising from conversion of the principal amount of loan would also be subject tothe usual prudential valuation norms as applicable to such instruments. Provisioning 81 Alliance Business Academy
  • 82. While there will be no change in the extant norms on provisioning for NPAs, banks which arealready holding provisions against some of the accounts, which may now be classified as„standard‟, shall continue to hold the provisions and shall not reverse the same.3.17 FUTURE OF THE INDIAN BANKING INDUSTRY:In the past few years, the Indian banking industry has come of age. There have been severalnew developments and innovations that are responsible for the growth of the same. One ofthe major drivers of growth of the Indian banking industry is the advent of globalization andliberalization. Globalization refers to extensive and liberal movement of goods, capital andpeople across nations. In India, the globalization process took off after 1991 in the shape ofthe banking reforms, which can rightly be called a watershed event in our march towardsglobalization.There have been several changes in the banking scenario due to globalization, which havebeen listed below:  Interest rates have moved downward to conform to the global pattern. Even spreads have fallen as much as 3%, while the figure was 6% prior to 1991, necessitating a quantum jump in the need for cost control measures and productivity goals.  Foreign trade as a percentage of GDP, which was less than 10% before 1991, now exceeds 20%. Thus, the demand for trade finance, payment services and investment volumes has a higher foreign component than before.  The legal and regulatory regime governing commerce, banking and industry in India is converging to global standards. This includes freer markets, privatization, securitization, etc. of particular importance to banks are international accounting standards and capital norms under Basel I and Basel II. 82 Alliance Business Academy
  • 83. 3.18 CHALLENGES FOR THE FUTURE:  The regulatory and political regimes vary considerably in some cases. A retreat-and- cut loss policy will be necessary where very adverse circumstances are encountered.  Wholesale banking in the global markets is likely to yield diminishing returns, unless the wholesale activities embrace non-traditional areas such as derivatives.  As of today Indian banks are less global than their developed country counterparts. This is an initial competitive disadvantage. Basically Indian banks need to ride on the India story in the global economy.  Risk management is a major challenge both in domestic and foreign assets. In the domestic area, the risk arises from the greater unhedged for-ex exposure of domestic borrowers as well as the greater competition they face. To meet this challenge, Indian banks must go beyond Basel II and manage their risk on the basis of lower correlation in a diversified portfolio, which is the advantage that they enjoy.Thus, we see that the Indian banks have a wide sea of opportunity in front of them because ofopening up of the global markets. But, at the same time, it also poses several challenges forthe same. As legal and state environment is increasingly becoming conducive, what is neededis a mindset to look beyond the horizon. Indian banks today have everything. They need to doonly one thing –dream big. The world will then follow them.3.19 GLOBAL DEVELOPMENTS AND NPAs: 83 Alliance Business Academy
  • 84. The core banking business is of mobilizing the deposits and utilizing it for lending toindustry. Lending business is generally encouraged because it has the effect of funds beingtransferred from the system to productive purposes which results into economic growth.However lending also carries credit risk, which arises from the failure of borrower to fulfillits contractual obligations either during the course of a transaction or on a future obligation.A question that arises is how much risk can a bank afford to take? Recent happenings in thebusiness world - Enron, WorldCom, Xerox, Global Crossing do not give much confidence tobanks. In case after case, these giant corporate became bankrupt and failed to provideinvestors with clearer and more complete information thereby introducing a degree of riskthat many investors could neither anticipate nor welcome. The history of financial institutionsalso reveals the fact that the biggest banking failures were due to credit risk.Due to this, banks are restricting their lending operations to secured avenues only withadequate collateral on which to fall back upon in a situation of default. 3.20 SPECIAL CASES3.20.1. Accounts with temporary deficiencies:The classification of an asset as NPA should be based on the record of recovery. Bank shouldnot classify an advance account as NPA merely due to the existence of some deficiencieswhich are temporary in nature such as non-availability of adequate drawing power based onthe latest available stock statement, balance outstanding exceeding the limit temporarily, non-submission of stock statements and non-renewal of the limits on the due date, etc. In thematter of classification of accounts with such deficiencies banks may follow the followingguidelines:Banks should ensure that drawings in the working capital accounts are covered by theadequacy of current assets, since current assets are first appropriated in times of distress.Drawing power is required to be arrived at based on the stock statement which is current. 84 Alliance Business Academy
  • 85. However, considering the difficulties of large borrowers, stock statements relied upon by thebanks for determining drawing power should not be older than three months. The outstandingin the account based on drawing power calculated from stock statements older than threemonths, would be deemed as irregular. A working capital borrower account will becomeNPA if such irregular drawings are permitted in the account for a continuous period of 180days even though the unit may be working or the borrowers financial position is satisfactory.Regular and ad hoc credit limits need to be reviewed/ regularized not later than three monthsfrom the due date/date of ad hoc sanction. In case of constraints such as non-availability offinancial statements and other data from the borrowers, the branch should furnish evidence toshow that renewal/ review of credit limits is already on and would be completed soon. In anycase, delay beyond six months is not considered desirable as a general discipline. Hence, anaccount where the regular/ ad hoc credit limits have not been reviewed/ renewed within 180days from the due date/ date of ad hoc sanction will be treated as NPA.3.20.2 Accounts regularized near about the balance sheet date:The asset classification of borrower accounts where a solitary or a few credits are recordedbefore the balance sheet date should be handled with care and without scope for subjectivity.Where the account indicates inherent weakness on the basis of the data available, the accountshould be deemed as a NPA. In other genuine cases, the banks must furnish satisfactoryevidence to the Statutory Auditors/Inspecting Officers about the manner of regularization ofthe account to eliminate doubts on their performing status.3.20.3Asset Classification to be borrower-wise and not facility-wise 85 Alliance Business Academy
  • 86. It is difficult to envisage a situation when only one facility to a borrower becomes a problemcredit and not others. Therefore, all the facilities granted by a bank to a borrower will have tobe treated as NPA and not the particular facility or part thereof which has become irregular. Ifthe debits arising out of devolvement of letters of credit or invoked guarantees are parked in aseparate account, the balance outstanding in that account also should be treated as a part ofthe borrower‟s principal operating account for the purpose of application of prudential normson income recognition, asset classification and provisioning.3.20.4. Accounts where there is erosion in the value of securityA NPA need not go through the various stages of classification in cases of serious creditimpairment and such assets should be straight away classified as doubtful or loss asset asappropriate. Erosion in the value of security can be reckoned as significant when therealizable value of the security is less than 50 per cent of the value assessed by the bank oraccepted by RBI at the time of last inspection, as the case maybe. Such NPAs may bestraightaway classified under doubtful category and provisioning should be made asapplicable to doubtful assets. If the realizable value of the security, as assessed by the bank/approved values/ RBI isless than 10 per cent of the outstanding in the borrower accounts, the existence of securityshould be ignored and the asset should be straightaway classified as loss asset. It may beeither written off or fully provided for by the bank.3.20.5. Advances to PACS/FSS ceded to Commercial Banks:In respect of agricultural advances as well as advances for other purposes granted by banks toceded PACS/ FSS under the on-lending system, only that particular credit facility granted toPACS/ FSS which is in default for a period of two harvest seasons (not exceeding two halfyears)/two quarters, as the case may be, after it has become due will be classified as NPA andnot all the credit facilities sanctioned to a PACS/FSS. The other direct loans & advances, ifany, granted by the bank to the member borrower of a PACS/ FSS outside the on-lending 86 Alliance Business Academy
  • 87. arrangement will become NPA even if one of the credit facilities granted to the sameborrower becomes NPA.3.20.6 Advances against Term Deposits, NSCs, KVP/IVP, etc.:Advances against term deposits, NSCs eligible for surrender, IVPs, KVPs and life policiesneed not be treated as NPAs. Advances against gold ornaments, government securities and allother securities are not covered by this exemption.3.20.7 Loans with moratorium for payment of interestIn the case of bank finance given for industrial projects or for agricultural plantations etc.where moratorium is available for payment of interest, payment of interest becomes dueonly after the moratorium or gestation period is over. Therefore, such amounts of interest donot become overdue and hence NPA, with reference to the date of debit of interest. Theybecome overdue after due date for payment of interest, if uncollected.In the case of housing loan or similar advances granted to staff members where interest ispayable after recovery of principal, interest need not be considered as overdue from the firstquarter onwards. Such loans/advances should be classified as NPA only when there is adefault in repayment of installment of principal or payment of interest on the respective duedates.3.20.8 Agricultural advancesIn respect of advances granted for agricultural purpose where interest and/or installment ofprincipal remains unpaid after it has become past due for two harvest seasons but for a periodnot exceeding two half years, such an advance should be treated as NPA. The above normsshould be made applicable to all direct agricultural advances as listed at items 1.1, 1.1.2 (i) to(vii), 1.1.2 (viii)(a)(1) and 1.1.2 (viii)(b)(1) of Master Circular on lending to priority sectorNo. RPCD.PLAN. BC. 12/04.09.01/2001- 2002 dated 1 August 2001. An extract of the list of 87 Alliance Business Academy
  • 88. these items is furnished in the Annexure II. In respect of agricultural loans, other than thosespecified above, identification of NPAs would be done on the same basis as non-agriculturaladvances which, at present, are the 180 days delinquency norm.Where natural calamities impair the repaying capacity of agricultural borrowers, banks maydecide on their own as a relief measure conversion of the short-term production loan into aterm loan or re-scheduled of the repayment period; and the sanctioning of fresh short-termloan, subject to various guidelines contained in RBI circulars. In such cases of conversion or re-scheduled, the term loan as well as fresh short-termloan may be treated as current dues and need not be classified as NPA. The assetclassification of these loans would thereafter be governed by the revised terms & conditionsand would be treated as NPA if interest and/or installment of principal remains unpaid, fortwo harvest seasons but for a period not exceeding two half years.3.20.9. Government guaranteed advances:The credit facilities backed by guarantee of the Central Government though overdue may betreated as NPA only when the Government repudiates its guarantee when invoked. Thisexemption from classification of Government guaranteed advances as NPA is not for thepurpose of recognition of income. With effect from 1st April 2000, advances sanctionedagainst State Government guarantees should be classified as NPA in the normal course, if theguarantee is invoked and remains in default for more than two quarters. With effect fromMarch 31, 2001 the period of default is revised as more than 180 days.3.20.10 Take-out Finance:Takeout finance is the product emerging in the context of the funding of long-terminfrastructure projects. Under this arrangement, the institution/the bank financinginfrastructure projects will have an arrangement with any financial institution for transferringto the latter the outstanding in respect of such financing in their books on a predetermined 88 Alliance Business Academy
  • 89. basis. In view of the time-lag involved in taking-over, the possibility of a default in themeantime cannot be ruled out. The norms of asset classification will have to be followed bythe concerned bank/financial institution in whose books the account stands as balance sheetitem as on the relevant date. If the lending institution observes that the asset has turned NPAon the basis of the record of recovery, it should be classified accordingly. The lendinginstitution should not recognize income on accrual basis and account for the same only whenit is paid by the borrower/ taking over institution (if the arrangement so provides). Thelending institution should also make provisions against any asset turning into NPA pendingits takeover by taking over institution. As and when the asset is taken over by the taking overinstitution, the corresponding provisions could be reversed. However, the taking overinstitution, on taking over such assets, should make provisions treating the account as NPAfrom the actual date of it becoming NPA even though the account was not in its books as onthat date.3.20.11 Post-shipment Suppliers CreditIn respect of post-shipment credit extended by the banks covering export of goods tocountries for which the ECGC‟s cover is available, EXIM Bank has introduced a guarantee-cum-refinance programs whereby, in the event of default, EXIM Bank will pay theguaranteed amount to the bank within a period of 30 days from the day the bank invokes theguarantee after the exporter has filed claim with ECGC.Accordingly, to the extent payment has been received from the EXIM Bank, the advance maynot be treated as a non-performing asset for asset classification and provisioning purposes.3.20.12 Export Project Finance:In respect of export project finance, there could be instances where the actual importer haspaid the dues to the bank abroad but the bank in turn is unable to remit the amount due topolitical developments such as war, strife, UN embargo, etc. 89 Alliance Business Academy
  • 90. In such cases, where the lending bank is able to establish through documentaryevidence that the importer has cleared the dues in full by depositing the amount in the bankabroad before it turned into NPA in the Books of the bank, but the importers country is notallowing the funds to be remitted due to political or other reasons, the asset classificationmaybe made after a period of one year from the date the amount was deposited by theimporter in the bank abroad.3.20.13 Advances under rehabilitation approved by BIFR/ TLI:Banks are not permitted to upgrade the classification of any advance in respect of which theterms have been re-negotiated unless the package of re-negotiated terms has workedsatisfactorily for a period of one year. While the existing credit facilities sanctioned to a unitunder rehabilitation packages approved by BIFR/term lending institutions will continue to beclassified as sub-standard or doubtful as the case may be, in respect of additional facilitiessanctioned under the rehabilitation packages, the Income Recognition, Asset Classificationnorms will become applicable after a period of one year from the date of disbursement.3.21 ROLE OF ARCIL:-This empowerment encouraged the three major players in Indian banking system, namely,State Bank of India (SBI), ICICI Bank Limited (ICICI) and IDBI Bank Limited (IDBI) tocome together to set-up the first ARC. Arcil was incorporated as a public limited company onFebruary 11, 2002 and obtained its certificate of commencement of business on May 7, 2003.In pursuance of Section 3 of the Securitization Act 2002, it holds a certificate of registrationdated August 29, 2003, issued by the Reserve Bank of India (RBI) and operates under powersconferred under the Securitization Act, 2002. Arcil is also a "financial institution" within themeaning of Section 2(h) (ia) of the Recovery of Debts due to Banks and Financial InstitutionsAct, 1993 (the "DRT Act"). 90 Alliance Business Academy
  • 91. Arcil is the first ARC in the country to commence business of resolution of non-performing assets (NPAs) upon acquisition from Indian banks and financial institutions. Asthe first ARC, Arcil has played a pioneering role in setting standards for the industry in India. Unlocking capital for the banking system and the economyThe primary objective of Arcil is to expedite recovery of the amounts locked in NPAs oflenders and thereby recycling capital. Arcil thus, provides relief to the banking system bymanaging NPAs and help them concentrate on core banking activities thereby enhancingshareholders value. Creating a vibrant market for distressed debt assets /securities in India offering a trading platform for LendersArcil has made successful efforts in funneling investment from both from domestic andinternational players for funding these acquisitions of distressed assets, followed byshowcasing them to prospective buyers. This has initiated creation of a secondary market ofdistressed assets in the country besides hastening the irresolution. The efforts of Arcil wouldlead the country‟s distressed debt market to international standards. To evolve and create significant capacity in the system for quicker resolution of NPAs by deploying the assets optimallyWith a view to achieving high delivery capabilities for resolution, Arcil has put in place astructure aimed at outsourcing the various sub-functions of resolution to specialized agencies,wherever applicable under the provision of the Securitization Act, 2002. Arcil has alsoencourage, groomed and developed many such agencies to enhance its capacity in line withthe growth of its activity. 91 Alliance Business Academy
  • 92. 4. ANALYSIS AND INTERPRETATIONIntroduction:For the purpose of analysis and comparison between Public and private sector banks, Wehave taken five banks from both sectors to compare the non-performing assets of banks. Forunderstanding we further bifurcate the non-performing assets in priority sector and non-priority sector, gross NPA and net NPA in percentage as well as in rupees, deposit –investment– advances.Further we also analysis on the basis of Deposit – Investment – Advances to get the clearview where the bank stands in the competitive market. At the end of March 2008, in privatesector ICICI Bank is the highest deposit-investment-advances figure in rupees crores, secondis HDFC Bank and KOTAK Bank has least figure.In public sector banks Punjab National Bank has the highest deposit investment-advances butwhen we look at the graph we can see that the Bank of Baroda and Bank of India are almostthe similar in numbers and Dena Bank is stands last in public sector bank. When we comparethe private sector banks with public sector banks, we can understand the more number ofpeople prefer to choose public sector banks for deposit-investment.4.1 DEPOSIT-INVESTMENT-ADVANCES (RS.CRORE) of both sector banks andcomparison among them, year 2008-09.Private Sector Banks:- (Rs in crore ) BANK DEPOSIT INVESTMENT ADVANCES AXIS 87626 33705 59661 HDFC 100769 49394 63427 ICICI 244431 111454 225616 KOTAK 16424 9142 15552 INDUSIND 19037 6630 12795 TOTAL 468287 210325 377051 92 Alliance Business Academy
  • 93. Analysis: From the above figure we can see that the ICICI Bank deposit-investment-advances are quite high than other banks like HDFC, AXIS, INDUSIND, KOTAK.4.2 Public Sector Banks:- BANK DEPOSIT INVESTMENT ADVANCES BOB 152034 43870 106701 BOI 150012 41803 113476 DENA 33943 10282 23024 PNB 166457 53992 119502 UBI 103859 33823 74348 TOTAL 606305 183770 437051 93 Alliance Business Academy
  • 94. Analysis: In public sector Punjab National Bank deposit-investment-advances arecomparatively quite high rather than Bank of Baroda, Bank of India, United bank of Indiaand Dena Bank. 4.3 COMPARISON BETWEEN ICICI BANK AND PUNJAB NATIONAL BANK IN TERM OF DEPOSIT-INVESTMENT-ADVANCES:-BANK DEPOSIT INVESTMENT ADVANCESICICI BANK 244431 111454 225616PNB 166457 53992 119502 94 Alliance Business Academy
  • 95. Analysis: -Here we have compared between ICICI BANK AND PUNJAB NATIONALBANK in term of deposit-investment-advances. From the above figure we can see that ICICIbank deposit and advances are quite higher than Punjab National Bank. But in case ofInvestment ICICI Bank investment amount is doubled than Punjab National Bank amount. 4.4 Gross NPA and Net NPA:-There are two concepts related to non-performing assets a) gross and b) net. Gross refers toall NPAs on a bank‟s balance sheet irrespective of the provisions made. It consists of all thenon-standard assets, viz. Substandard, doubtful, and loss assets. A loan asset is classified as „substandard” if it remains NPA up to a period of 18 months; “ doubtful” if it remains NPAfor more than 18 months; and loss, without any waiting period, where the dues areconsidered not collectible or marginally collectible.Net NPA is gross NPA less provisions. Since in India, bank balance sheets contains a hugeamount of NPAs and the process of recovery and write off of loans is very time consuming, 95 Alliance Business Academy
  • 96. the provisions the banks have to make against the NPA according to the central bankguidelines, are quite significant.Here, we can see that there are huge differences between gross and net NPA. While grossNPA reflects the quality of the loans made by banks, net NPA shows the actual burdenof banks. The requirements for provisions are:  100% for loss assets  100% of the unsecured portion plus 20-50% of the secured portion, depending on the period for which the account has remained in the doubtful category  10% general provision on the outstanding balance under the substandard category.Here, there are gross and net NPA data for 2007-08 and 2008-09 we taken for comparisonamong banks. These data are NPA AS PERCENTAGE OF TOTAL ASSETS. As wediscuss earlier that gross NPA reflects the quality of the loans made by banks. Among all theten banks Dena Banks has highest gross NPA as a percentage of total assets in the year 2007-08 and also net NPA. Punjab National Bank shows huge difference between gross and netNPA. There is an almost same figure between BOI and BOB. 4.5 Gross NPA and Net NPA Of different Public Sector banks in the year 2007-08 BANK GROSS NPA NET NPA BOB 1.46 0.35 BOI 1.48 0.45 DENA 2.37 1.16 PNB 2.09 0.45 UBI 1.82 0.59 96 Alliance Business Academy
  • 97. Analysis: here Dena bank having highest gross NPAs and highest net NPAs incomparison on other Banks which shows that Dena bank. 4.6 Gross NPA and Net NPA Of different Public Sector banks in the year 2008-09 BANK GROSS NPA NET NPA BOB 1.10 0.27 BOI 1.08 0.33 DENA 1.48 0.56 PNB 1.67 0.38 UBI 1.34 0.10 97 Alliance Business Academy
  • 98. Analysis: In 2007-2008 Gross and Net NPAs of DENA Bank is higher in comparison otherbanks but in 2008-09 PNB having a highest Gross and Net NPAs.4.7 Gross NPA and Net NPA Of different Private Sector banks in the year2007-08 BANK GROSS NPA NET NPA AXIS 0.57 0.36 HDFC 0.72 0.22 ICICI 1.20 0.58 KOTAK 1.39 1.09 INDUSIND 1.64 1.31 98 Alliance Business Academy
  • 99. Analysis: From the above information its clearly shows that INDUIND Bank having highestgross and Net NPAs in comparison to other Private Banks. 4.8 Gross NPA and Net NPA Of different Private Sector banks in the year2007-08 BANK GROSS NPA NET NPA AXIS 0.45 0.23 HDFC 0.68 0.22 ICICI 1.90 0.87 KOTAK 1.55 0.98 INDUSIND 1.69 1.25 99 Alliance Business Academy
  • 100. Analysis: In 2007-08 Gross and Net NPAs of INDUSIND is highest and In 2008-09 Grossand Net NPAs of ICICI Bank is highest in comparison other bank. 4.9 Comparison of GROSS NPA with Public and Private sectors banks for the year 2007-08Analysis: Comparison of GROSS NPA with all banks for the year 2007-08.The growingNPAs affect the health of banks, profitability and efficiency. In the long run, it eats up thenet worth of the banks. We can say that NPA is not a healthy sign for financial institutions. 100 Alliance Business Academy
  • 101. Here we take all the ten banks gross NPA together for better understanding. Average of theseten banks gross NPAs is 1.29 as percentage of total assets. So if we compare in private sectorbanks AXIS and HDFC Bank are below average of all banks and in public sector BOB andBOI. Average of these five private sector banks gross NPA is 1.25 and average of publicsector banks is 1.33. 4.10 COMPARISON OF NET NPA WITH PUBLIC AND PRIVATE SECTORS BANKS FOR THE YEAR 2007-08Analysis: Comparison of NET NPA with all banks for the year2007-08. Average of theseten bank‟s net NPA is 0.56. And in the public sector banks all these five banks are belowthis. But in private sector banks there are three banks are above average. The differencebetween private and public banks average is also vast. Private sector banks net NPA averageis 0.71 and in public sector banks it is 0.41 as percentage of total assets. As we know that netNPA shows actual burden of banks. Indus India bank has highest net NPA figure and HDFCBank has lowest in comparison. 101 Alliance Business Academy
  • 102. 4.11 PRIORITY –NON PRIORITY PRIVATE SECTOR BANKS SECTOR BANK AGRI SMALL OTHERS PRIORITY NON-PRIORITY (1) (2) (3) SECTOR ( 1+2+3 ) AXIS 109.12 14.76 86.71 210.59 275.06 HDFC 36.12 110.56 47.70 194.41 709.23 ICICI 981.85 23.35 354.13 1359.34 6211.12 KOTAK 10.00 33.84 4.04 47.87 405.20INDUSIND 30.44 3.18 30.02 63.64 328.67 TOTAL 1167.53 185.69 522.60 1875.85 7929.28Analysis: When we further bifurcate NPA in priority sector and Non priority sector.Agriculture + small + others are priority sector. In private sector ICICI Bank has the highestNPA with compare to other private sector banks. Around 72% of NPAs in priority sector andaround 78% in non-priority sector. We can see that in private sector banks have more NPA innon-priority sector than priority sector. 102 Alliance Business Academy
  • 103. 4.12 PRIORITY –NON PRIORITY PRIVATE SECTOR BANKS SECTOR BANK PRIORITY SECTOR NPA (ADVANCED RS.CRORE ) BOB 5469 350 BOI 3269 325 DENA 1160 106 PNB 3772 443 UBI 1924 197Analysis:When we talk about public sector banks they are more in priority sector and they giveadvanced to weaker sector or industries. Public sector banks give more loans to Agriculture,small scale and others units and as a result we see that there is more number of NPA in publicsector banks than private sector banks. BOB given more advanced to priority sector in 2008-09 than other four banks. 103 Alliance Business Academy
  • 104. 4.13 COMPARISON BETWEEN PRIVATE AND PUBLIC BANKS ON NPA IN BOTH PRIORITY AND NON PRIORITY. PUBLIC SECTOR NEW PRIVATE SECTOR 2007-08 2008-09 2007-08 2008-09 PRIORITY 22954 25287 1468 2080 PUBLIC 490 299 3 0 NON PRT 15158 14163 4800 8339 TOTAL 38602 39749 6271 10419Analysis:But when there are comparison between private bank and public sector bank still ICICI Bankhas more NPA in both priority and non-priority sector with the comparison of public sectorbanks. Large NPA in ICICI Bank because the strategy of bank that risk-reward attitude and 104 Alliance Business Academy
  • 105. initiative in each sector. Above we also discuss that ICICI Bank has highest deposit-investment-advance than other banks.Now, when we compare the all public sector and private sector banks on priority and non-priority sector the figures are really shocking. Because in compare of private sector banks,public sector banks numbers are very large.Here, there are huge differences between private and public sector banks NPA. There isincrease in new private sector banks NPA of Rs.4148 cr in 2008-09 which is almost 66% risethan previous year. In public sector banks the numbers are not increased like private sectorbanks. 105 Alliance Business Academy
  • 106. 5. SUMMARY OF FINDINGS, CONCLUSIONS & SUGGESTIONS:5.1 INTRODUCTION:The study entitled “Comparative Analysis on Non Performing Assets of Private And PublicSector Banks” was conducted to study the various types of strategies adopted by the Indianbanks to bring down the level of NPAs as well as several account specific actions and thepolicy guidelines, which help in effective recovery. With the increase in the growing volumeof credit, the volume of impaired credit has also multiplied due to various factors. Thisburgeoning level of NPA had become a grave matter of concern for the Indian banks.In the study conducted focus was laid on the approach of various banks to manage NPAs, theprocess of identification of the same, the classification and assessment of provisions and thepre-sanction appraisal methodology and the post-sanction follow-up procedure. It also dealtwith the various measures adopted by banks for reduction of their NPAs.The measures to tackle the NPAs adopted by the bank includes the increasing use of theforum of Lok Adalats, Civil Courts, Debt recovery Tribunal, use of Corporate Debt Re-Structuring, One-time settlement schemesThe nature of research was descriptive as well as exploratory as the study was aimed atstudying the various measures adopted by banks for management of NPAs5.2 SUMMARY OF FINDINGS:The following are the main findings from the study conducted:  Banking sector plays an indispensable role in economic development of a country through mobilization of savings and deployment of funds to the productive sectors. Currently the Indian banking sector is not in a good health. The symptoms of the disease are vastly apparent viz. rising NPAs, high labor costs, competition from mutual funds, bureaucratic hurdle etc. 106 Alliance Business Academy
  • 107.  An asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank. NPAs are those assets which do not generate any income to the banks. They drain off the profit of the banks earned by the performing assets. The NPA affects the banks and financial institutions mainly in the following ways: At the Macro level, NPAs have choked off the supply line of credit of the potential lenders thereby having a deleterious effect on Capital formulation and arresting the economic activity in the country. At the Micro level, unsustainable level of NPAs has eroded current profits of Banks. They have led to reduction in interest income and increase in provisions and have restricted the recycling of funds leading to various asset-liability mismatches. Besides this, it has led to erosion in their capital base and reduction in their competitiveness. The mounting menace of NPAs has raised the cost of credit, made Indian businessmen uncompetitive as compared to their counterparts in other countries. It has made Banks more averse to risks and squeezed genuine Small and Medium enterprises from accessing competitive credit and has throttled their enterprising spirits as well to a great extent. While The Banking Industry in India is progressively complying with the international prudential norms and Accounting practices, there are certain areas like recovery management in which it does not have a level playing field as compared to other participants in the International financial markets. Our existing legal frame work relating to the commercial transactions has not kept pace with the changing times, this resulted in slow pace of recovery of defaulting loan & mounting levels of NPA‟s in banks. 107 Alliance Business Academy
  • 108.  It was found that the main reason for NPAs in banks is diversion of funds, improper credit appraisal and willful default followed by decrepit legal system, cost ineffective legal measures, lack of effective follow-up and difficulty in execution of decrees. The measures to tackle the NPAs adopted by the bank includes the increasing use of the forum of Lok Adalats, Civil Courts, Debt recovery Tribunal, use of Corporate Debt Re-Structuring, One-time settlement schemes The banker had limited options for recovery which consisted of having an intensive follow-up and interaction with the borrower and initiating legal actions either through courts or Debt recovery tribunals. The upfront payment by the borrower for challenging the action of the private bank should be re-introduced with a lesser percentage of the claimed amount. The lending bank should be given more powers to seize and dispose off the security and to attach any other additional security/asset available with the defaulting borrower and court intervention in such proceeding should be eliminated. Public banks Bankers has to handling the recovery operations should be educated on the management and disposal process of the acquired assets and should also be provided with management expertise while taking over the operations of the companies. The recovery pattern of public banks in context of NPAs is very long and there is many mistakes in there planning process for collecting credit from the persons. 108 Alliance Business Academy
  • 109. 5.3 CONCLUSIONS:Objective No.1:  To study the methodology adopted by Public and private banks to classify and categorize NPAs.RBI introduced prudential norms on the recommendations of the Narasimham committee inthe year 1992-93. The above norms have three main criteria: Asset classification Income Recognition Provisioning1. ASSET CLASSIFICATION:The loans given by the Banks are classified into performing and non-performing assets on thefollowing basis: Performing Assets: also known as standard assets are the assets which do not disclose any problem and which do not carry more than the normal risk attached to the business. Performing asset is one which generates income for the bank. It is an asset where the interest and or principal are not overdue beyond 180 days (modified to 90 days w.e.f. Mar 2004) at the end of the financial year. Non Performing Assets: An amount is to be treated as non performing asset when it ceases to generate income for the Bank. An asset may be treated as Non Performing Asset (NPA), if interest and /or installment of Principal remain overdue for a period exceeding 180 days (modified to 90 days w.e.f. Mar 04)and Banks and FIs should not take into their Income account, the interest accrued on such NPAs, unless it is actually received/recovered. NPAs are further classified into: 109 Alliance Business Academy
  • 110. a) Substandard Assets: Loans which are non-performing for a period not exceeding two years, where the current net-worth of the borrower or the current market value of the security, against which the loan is taken, is not enough to ensure full recovery of the debt. b) Doubtful Assets: Loans which have remained non-performing for a period exceeding two years and which are not classified as loss assets by the management or the internal/external auditor appointed by RBI. c) Loss Assets: Assets where loss has been identified by the internal/external auditor of the bank or the RBI, but the amount has not been written-off wholly or partly. These assets are considered unrecoverable and are of little value to the lending institution.2. INCOME RECOGNITION:The income recognition is linked to the concept of performance of the assets. In other wordsthe income from performing assets only is to be recognized. The income from non-performing assets is recognized only to the extent of actual recovery made during theaccounting year.3. PROVISIONING:The amount of provision required to be created for each asset depends on the classificationof the assets, availability/value of security, other guarantee available, the age of the NPA etc.From the foregoing, it may be observed that the Prudential norms have twin effect on theprofitability of the Banks: The income from the non-performing assets cannot be recognized except to the extent of actual recovery. Bank is required to create provision for the non-performing assets.Both these have a negative impact on the profitability of banks. 110 Alliance Business Academy
  • 111. Objective No.2:  Guidelines issued by RBI and the various strategies adopted by the banks for controlling NPAs and effective strategies to be used for NPA retrieval.The various measures used to reduce NPAs are as follows:1) Dismantling of controls and deregulation of working of commercial banks2) The process of deregulation freed the banks from the control of the Finance Ministry andRBI3) RBI in the year 1993 introduced prudential norms as conveyed by Basel Accord of 1988applicable to Indian banks4) Avenues of New Recovery Forums/strategies5) Banks were permitted to seek infusion of fresh equity from the public retainingGovernment share of equity capital at 51%6) Rescheduling Or Restructuring at the bank level7) Lok Adalats8) Corporate Debt Restructuring Mechanism9) Debt Recovery Tribunal (DRT)10) One Time Settlement Schemes (OTSS)11) Asset Reconstruction & Securitization12) Strengthening of Board for Industrial and Financial reconstruction (BIFR)Objective No.3: 111 Alliance Business Academy
  • 112.  To assess the effectiveness of the act in realizing the proposed objectives.1) It was evident after the analysis as that 100% of the respondents said that the securitizationact has empowered the banks with additional powers by facilitating the setting up of Assetreconstruction companies/Securitization companies.2) It was evident that the Act has helped in reduction of NPAs in the banks as 88% of therespondents said that the enactment of the Securitization Act has reduced the level of NPAsin the banks and they rated the impact of Securitization act in reduction of NPAs as five andabove 5.3) The mean Gross NPA of both public sector as well as private sector banks has decreasedafter Securitization Act of 2002, thereby leading to an overall decline in combined NPA aftercoming up of the Act.4) The mean Net NPA of public sector banks has decreased, but the mean Net NPA of privatesector banks has increased after Securitization Act of 2002. Although it is evident that there isa overall decline in mean Net NPA of both the banks taken together after coming up of theAct.5) The Mean of percentage of NPA to Net advances of both public as well as private sectorbanks has declined after Securitization Act, 2002. Thereby leading to a overall decline inMean of percentage of NPA to Net advances of both the banks taken together after coming upof the Act.6) From the T-test, it was clearly revealed that their exists a statistical significant differenceamongst the Gross NPA, Net NPA and percentage of NPA to Net advances of both the publicas well as private sector banks before as well as after the Securitization Act, 2002.7) Although the Securitization Act, 2002 has not helped in reduction of Gross as well as NetNPAs of the private sector banks in comparison to the public sector banks where it hasreduced the level of Gross as well as Net NPAs. But, at the same time it has helped inreduction of the percentage of NPA to Net advances of the private sector banks. 112 Alliance Business Academy
  • 113. It could be concluded that the SARFAESI Act, 2002 holds the promise of reformulating thecontours of asset management and of rectifying the imbalance between borrowers and tendersin India, a direct consequence of which has been the colossal accumulation of NPAs. Theloopholes and inequalities of in the act need to be ironed out through appropriate legislativemeasures. The basic structure of the act must not be tampered with, though a few changeslike making appeals easier, framing rules and guidelines to prevent misuse of the powersunder the Act, making a reasonable distinction between willful and other defaulters etc., canbe considered.It must be said that the Act, by empowering lenders to exercise their right of expeditiousattachment and foreclosure for the enforcement of security, has made a beginning in the rightdirection.Moreover, if the banks have to survive in the competitive and increasingly globalized marketconditions they should be helped both by the RBI and the government in the form of fasterrecovery climate, especially for the legal processes of enforcement of contracts. Till suchtime the banks may be helped by recognizing their provisions against standard assets,additional provisions over and above the prudential norms, etc., as Tier II capital.5.4 SUGGESTIONS:The following are the suggestions to reduce the level of mounting NPAs in banking sectors.  In India, bulk of the NPAs relate to units that are either defunct or in sectors like steel and textiles that have become uncompetitive or obsolete with the opening up of the economy, lowering of tariffs or introduction of modern technology etc. Unlike other countries, where there are specialized markets for buying out the NPAs and selling them overtime, there is no market for distressed assets in India. Hence specialized markets for such assets must be established.  Fixing up the budget for profits and recovery rather than for advances. Budget oriented approach at times leads to release of credit facilities without ensuring compliance of covenants of sanction. A suitable mechanism could be drawn at each 113 Alliance Business Academy
  • 114. bank level to provide monetary benefits/ re-organization of the operating staff particularly for recovery in NPA‟s write-off cases. Projects with old technology should not be considered for finance. Large exposure for big corporate/single project should be avoided. Up gradation of credit skills of the operating staff working in advance. Timely sanction/ release to avoid time and cost overruns. Possible restructuring of banks through mergers and acquisitions to keep themselves competitive in the high credit risk market in India. Unless the magnitude of NPA‟s is brought down and ROA levels improved banks may not be able to infuse the confidence in the market in general and capital market in particular order to meet their capital adequacy needs. Banks and Asset reconstruction companies must be given sufficient legal powers to recover the assets and dispose them off without the intervention of the courts. The banks and FIs will be shareholders as well as the customers of the ARCs and hence they have an interest in its financial performance, therefore the ARCs have to be given operational independence. Banks should recognize hidden losses in transfer of NPAs to ARCs, if banks transfer the NPAs at the market price they will have to book further losses. Government should evolve a mechanism to quantify these losses and arrange to recapitalize banks. The NPA assets must be rated by a rating agency which would facilitate the market for such assets this would in turn reduce the holding cost of the seized assets to the bank. 114 Alliance Business Academy
  • 115. MY LEARNINGS:It was a great learning experience and a period of value addition in terms of knowledgeinstilled. Some of my leanings are:  I got an insight that with increasing globalization and with diversified ownership where credit rating agencies constantly review the strength of banks, managing the level of NPAs becomes very critical. It is a fact that the most critical condition for bringing about an improvement in the profitability of banks is a reduction in the level of non-performing assets. In view of this, the RBI along with the Government has initiated several institutional measures to contain the levels of NPAs.  During the period, I learnt about the banking industry, its history, deficiencies, composition, RBI guidelines as well as present and the future potential of this particular industry.  The project provided with the information regarding the monitoring system used by the banks for monitoring NPAs, the performance of various Indian banks in the wake of their NPA management techniques, the process of NPA recovery, their risk management techniques and various measures adopted by banks for reduction of NPAs.  As I have undergone the process of research in a systematic way, I clearly understood how to carry out a research. I understood various aspects of research in a more 115 Alliance Business Academy
  • 116. practical manner, starting from identifying a problem to eliciting the solutions to that problem.BIBLIOGRAPHY:BOOKS  Bidani, S.N, “Managing Non-Performing Assets in banks”  Chandra, Prasanna, “Financial Management”, Tata McGraw Hill publishing Limited  Gordan, Natarajan, “ Financial Markets and Services- HPH”  Bhat, Suhindra, “Financial Institutes and Markets”, Excel Books  Cooper Schindler, “Business Research Methods”, 9th edition, Tata McGraw Hill publishing Limited  Kothari, C.R., “Research Methodology”, Revised Second edition, New Age International Publishers, New Delhi, 2006, ISBN no. 81-224-1522-9JOURNALS  Goel, GC., “ Indian Banker”, Issue-12, Volume-2, Dec-07  Pillai, Manoj, “Prajnan”, Issue-2, Volume-3, Feb-08 116 Alliance Business Academy
  • 117.  Sona, School of management Journal, “Global Management Review”, Issue-4, Volume-2, Aug-08  Ammannaya, K., “Indian Banker”, Issue-10, Volume-3, Oct-08  Rajendran, D.S., “Indian Banker”, Issue-5, Volume-3, May-08  Padhy, Kishore Chandra, “Pratibimba: Journal of IMIS, Issue-2, Volume-2, Feb-07  Krishnmoha, N.V Rao, D.Suryachandra, “Gitam Journal of Management”, Issue-2, Volume-5, Feb-08  Sharma, K.C., “Indian Banker”, Issue-4, Volume-2, Apr-07  Deepak K Srivastava, Umesh Holani, Naval Bajpai, “ Prajnam- Banking Reforms, Indian Public Sector Bank”, Issue-1, Volume-35, Feb-07  BANKING LAWS- “SECURITISATION ACT”, dated Oct11-17, 2004, Page no: 183 to 192WEB SITES www.livemint.comOTHER SOUCES  Annual reports of the banks  RBI bulletins and journals  Financial Magazines 117 Alliance Business Academy
  • 118. 118Alliance Business Academy